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Edited Transcript of HOMB earnings conference call or presentation 16-Jul-20 6:00pm GMT

Q2 2020 Home BancShares Inc Earnings Call

CONWAY Jul 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Home BancShares Inc earnings conference call or presentation Thursday, July 16, 2020 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian S. Davis

Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Executive Officer & Director

* Christopher C. Poulton

Home Bancshares, Inc. (Conway, AR) - President of Centennial Commercial Finance Group

* Donna J. Townsell

Home Bancshares, Inc. (Conway, AR) - Senior EVP, Director of IR, Executive Officer & Director

* John Marshall

HomeStreet, Inc. - President of Shore Premier Finance

* John Stephen Tipton

Home Bancshares, Inc. (Conway, AR) - COO & Executive Officer

* John W. Allison

Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer

* Kevin D. Hester

Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer

* Tracy M. French

Home Bancshares, Inc. (Conway, AR) - Executive Officer & Director

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Conference Call Participants

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* Brady Matthew Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Brian Joseph Martin

Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts

* Jon Glenn Arfstrom

RBC Capital Markets, Research Division - MD of Financial Services Equity Research & Analyst

* Joseph Anthony Fenech

Hovde Group, LLC, Research Division - Managing Principal & Head of Research

* Matthew Covington Olney

Stephens Inc., Research Division - MD

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* Stephen Kendall Scouten

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Home Bancshares, Inc. second quarter earnings conference call. (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.

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Donna J. Townsell, Home Bancshares, Inc. (Conway, AR) - Senior EVP, Director of IR, Executive Officer & Director [2]

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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.

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Executive Officer & Director [3]

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Good afternoon, and thank you, Donna. The new normal is normal in a lot of ways for Centennial Bank. Last quarter, we were in a time of uncertainty. Well, I feel much better today as we live the new normal. You will see why as I share with you some of the Centennial Bank information. 14% deposit growth this past quarter. 5% loan growth this past quarter. 29% decrease in interest cost this past quarter and 53% decrease the first 6 months of 2020 compared to the first 6 months of 2019.

Net interest income up 6.4% linked quarter. 9% increase in noninterest income with mortgage, up 49% comparing the first 6 months of 2020 to 2019. The bank's core ROA is over 2% year-to-date.

Non-GAAP efficiency at 37%. Johnny?

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [4]

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It's a little high.

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Executive Officer & Director [5]

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A little high.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [6]

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We'll be getting Donna back in there, to see if we can get it down to the 20s.

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Executive Officer & Director [7]

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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' numbers 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, the P represents the word powerful in our group. While our team has done some amazing things over the past 20 years that we've been together, the last 6 months may have just topped them all.

As we work through events that have never ever happened before, such as the new accounting method for loan loss reserves and the shutting down or trying to shut down the economy, our bankers continue to address the challenges and tackle them head on. The efforts have been phenomenal, and our company is prepared for the future whatever it throws our way.

I may be considered the cautious one in this group, but all of us are focused on the true basics of running a safe and sound company. We are communicating with our customers on a regular basis. Over the past several months, Johnny and I have discussed with individual customers their business situations, how are they adjusting to the new normal and how are things in their economy that affects them. It is refreshing to get the real information, and that's just not 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 to date -- 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 why we get through today.

I believe I've heard our Chairman use the word blocking and tackling, that is what we're all doing in all areas of this company to provide the numbers that we are reporting today while preparing for a successful future for our shareholders. Donna?

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Donna J. Townsell, Home Bancshares, Inc. (Conway, AR) - Senior EVP, Director of IR, Executive Officer & Director [8]

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Thank you, Tracy. That's a great overview of Centennial Bank. And now Brian Davis will walk us through the margin and CECL.

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Executive Officer & Director [9]

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Thanks, Donna. I'm pleased to report for the second quarter, it was a record for our net interest income. For Q2 2020, we reported $148.7 million of net interest income. This is an increase of $8.9 million or 6.4% from the first quarter of 2020.

I'm also pleased to report the second quarter net interest margin was 4.11% compared to 4.22% for the first quarter.

Normally, we would not be pleased with an 11 basis point decline in margin. However, as a result of these crazy times, the decline in margin is primarily the result of COVID-19.

With that said, let me walk you through the margin. First, the company participated in the PPP loan program during the second quarter of 2020. As of June 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 markets. 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, results in a 16 basis points of noise when comparing linked quarters. With that said, our net interest margin is actually up 5 basis points on an apples-to-apples basis.

Let's change to CECL. Our CECL provisioning model is significantly tied to projections and unemployment rates, which have remained elevated during Q2. During Q2, we recorded $11.4 million of credit loss expense. This expense is primarily related to the impact of COVID-19. Additionally, CECL requires a liability for unfunded commitments. This quarter, we increased our liability for unfunded commitments to $9.2 million. The increase in the expected funding of unfunded commitments was $5.9 million of the expense. The remaining is primarily related to the COVID-19.

I'll conclude with a few remarks on capital. Our goal at Home Bancshares is to be extremely well capitalized. I'm pleased to report the following strong capital information. For Q2 2020, our Tier 1 capital was $1.6 billion compared to total risk-based capital that was $2 billion and risk-weighted assets were $12.5 billion. As a result, the leverage ratio was 10.3%, which is 105% above the well-capitalized benchmark of 5%.

Common equity Tier 1 was 12.0%, which is 85% above the well-capitalized benchmark of 6.5%.

Tier 1 capital was up 57 basis points to 12.6%, which is 58% above the well-capitalized benchmark of 8%. Our 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.

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Donna J. Townsell, Home Bancshares, Inc. (Conway, AR) - Senior EVP, Director of IR, Executive Officer & Director [10]

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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.

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer [11]

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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 2020. As of June 30, 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 1/3 of our employees working on this project, and I am very proud of the product that we built in a very short time.

From a dollar perspective, the top 3 industries were construction at $142 million, hotels and restaurants at $117 million and healthcare at $100 million. As for numbers of PPP loans, professional services replaced healthcare in the top 3. We read about Congress potentially allowing an entity to apply for a second PPP loan under certain circumstances, and we are preparing for that possibility by making sure that we have the ability to reach maximum approval bandwidth very quickly.

We've also been building out the forgiveness workflow, but it does not appear that the SBA is in any hurry to provide details of how that forgiveness will be transmitted to them. We believe that the June PPP changes will extend the covered period to spend the PPP money among other things, will serve to significantly decrease the possibility that a material portion of our PPP fundings will not be forgiven. Any approval of an automatic forgiveness under, say, $150,000, would reduce that even further.

Regarding loan deferments, as of June 30, we had executed first time 90-day loan deferments on just over 4,200 loans totaling $3.18 billion or 27% of our loan portfolio. Geographically, Florida borrowers made up 58% of the deferment balance, followed by Arkansas at 35% with CCFG, Alabama and Shore at 3%, 2% and 2%, respectively. As a percentage of their respective portfolios, the community bank regions were between 30% and 35% deferred, while Shore and CCFG were much lower at 11% and 5%, respectively.

Based on industry, real estate lessors made up the largest balance at $1.2 billion, with hotels and restaurants at $607 million. After that, it drops off sharply to healthcare at $272 million. As a deferred percentage of their portfolio, hotel and restaurants were at 67%, followed by healthcare at 52% and real estate lessors and retail trade, both at 33% each.

As we mentioned last quarter, we were very quick to implement the deferment process as we had procedures and forms already in place from earlier disasters on a regional basis. We were very quick to move, and as in earlier uses, we were very liberal with the first deferral. While this may have resulted in a higher initial deferral percentage than our peers, we believe that the early ability to help our customers in this situation is very important and helpful to their overall ability to stay in business.

The second deferral process is in place and has been operational for about 2 weeks. It involves a defined process of information gathering and discussions with the borrower about current operations. Levels of approval are based on loan size, and assessments of current risk grade and ultimate ability to stay in business are being captured and monitored as we progress.

As of today, we've processed about $1.5 billion or almost 50% of the initial $3.18 billion of deferred loan balances. And 80% of those or $1.2 billion are going back to normal P&I payments at this time. I know it's still early to attempt to see the end of this event, I'm looking forward as we review our largest community bank customers that have been on deferral for 90 days, nearly all of these are commercial real estate secured.

Projecting what I could see as a worst-case scenario for any of these that do go through a second 90-day deferral and still need further assistance, one option would be a longer-term modification to interest-only payments combined with a capitalization of accrued interest. Using our average community bank LTV of 61% for CRE loans, this capitalization of interest would only add 1% 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.

Since last quarter's call, we've had a couple of calls to discuss various aspects of our lending business. We started with the call in mid-June on hospitality. Monthly and June numbers have come in since that call and the extended stay portfolio continues its strong showing. 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, but many of those are highly dependent upon airport business. On the whole, June appears to have been an improvement over May.

All asset quality metrics improved this quarter with NPAs at 0.39% and NPLs at 0.5%, down 5 basis points and 3 basis points quarter-over-quarter, respectively. As Brian mentioned, the allowance coverage for nonperforming loans improved to almost 400%, while past dues decreased to pre-COVID levels in dollars and at 0.56%, are near a historic low.

Combined with the significant migration of deferred loans back to P&I payments this quarter and an allowance for credit losses above 2%, we believe that we are in a very strong position at this point in the pandemic loan cycle.

Before I end, I would like to talk about our mortgage group. They just posted their most profitable quarter in the company's history. Closings were up 50% year-to-date over the same period of 2017 through 2019. And secondary market loans are 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 3 or 4 years leading up to this difficult time has put us in a position to succeed.

That concludes my remarks, and I'll turn it back over to Donna.

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Donna J. Townsell, Home Bancshares, Inc. (Conway, AR) - Senior EVP, Director of IR, Executive Officer & Director [12]

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Thank you, Kevin. It is good to hear that hotel occupancy rates are going up. And so far, the deferral requests may be going down.

Up next is going to be Chris Poulton with our CCFG division.

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Christopher C. Poulton, Home Bancshares, Inc. (Conway, AR) - President of Centennial Commercial Finance Group [13]

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Thank you, Donna. Good afternoon. As many of you know, 2 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 of 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 paydowns. We were pleased to see that we received just over $150 million of payoff/paydowns 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 product, asset class and regional diversity in our portfolio allow us to both better manage risk and seek opportunities as they emerge. It's pleasing to see payoffs 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.

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Donna J. Townsell, Home Bancshares, Inc. (Conway, AR) - Senior EVP, Director of IR, Executive Officer & Director [14]

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Thank you, Chris. And now we get to hear about what's become an even more popular past time, boating. So John Marshall, can you please give us an update on Shore Premier.

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John Marshall, HomeStreet, Inc. - President of Shore Premier Finance [15]

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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 on how the boating yacht industry would be impacted in the quarter. The commercial side of our business observed foreign factories temporarily suspend production and domestic dealers cautiously manage down inventories and took steps to preserve cash flow. We saw 4 planned line utilizations drop from 58% to 47% as our dealers prudently reduced inventory and borrowings by about $26.8 million in the quarter.

Conversely and perhaps counterintuitively, our consumer business received and underwrote record numbers of applications early in the quarter, leading to an all-time record for a single month's 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 reflection on the team's effort, but still insufficient to offset the headwinds of prepayments and declining commercial inventories. So in this cross-wind environment, consolidated loan balances have contracted $18 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 as 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 has not negatively impacted asset quality. Commercial systems were merged in late March and consumer platforms consolidated this past weekend. Consumer FICOs held steady for originated loans in the quarter at 773 compared to an overall portfolio of FICO of 774. Delinquencies improved in the quarter from 44 basis points to 30 basis points, and nonperforming 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 a principal deferral program in the quarter with payments resuming this month. We had 244 consumers enroll 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.

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Donna J. Townsell, Home Bancshares, Inc. (Conway, AR) - Senior EVP, Director of IR, Executive Officer & Director [16]

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Thanks, John. Now Stephen Tipton has an interesting report on our deposit side of the house.

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John Stephen Tipton, Home Bancshares, Inc. (Conway, AR) - COO & Executive Officer [17]

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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 deposits -- as time deposit balances declined by $147 million while noninterest-bearing balances swelled by $989 million to over $3.4 billion or 26% of our total deposit balances. We would like to congratulate our branch network and online support teams as they opened nearly 16,000 new accounts in the second quarter. While much of this is attributable to PPP funding, it is a testament to the relationships our bankers have and our commitment to the continued success of these customers.

Switching to funding costs. I want to first highlight our efforts on interest-bearing deposit costs in the quarter. Interest-bearing deposits averaged 64 basis points in Q2, which was down 44 basis points on a linked-quarter basis, but for additional color, averaged 60 basis points in the month of June. Total deposit costs, which includes noninterest-bearing deposits, were 48 basis points in Q2 2020, which was down 37 basis points from the previous quarter. Total deposit costs in June averaged 44 basis points and our teams continue to work negotiated rates down as the market will allow.

As I mentioned last quarter, we continue to see opportunity in repricing our time deposit portfolio. In the second half of 2020, we have $845 million in CD balances maturing at a weighted average rate of 1.53%.

Switching to loans. We saw total production, excluding PPP, of $530 million in Q2, with a little over $420 million coming from the community bank and Shore Premier footprint.

Payoff volume at $708 million was elevated from prior quarter and highlighted by a higher level of payoffs, as Chris has mentioned, and 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 1-month LIBOR adjusting monthly. As of June 30, 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 6 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 0 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 5.2%.

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

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Donna J. Townsell, Home Bancshares, Inc. (Conway, AR) - Senior EVP, Director of IR, Executive Officer & Director [18]

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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've heard, it's been a remarkable quarter for Home.

To share some final thoughts with you before we go to Q&A is our Chairman, John Allison.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [19]

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Thank you, and welcome, everyone. I think that was pretty impressive that $1.66 billion worth of deposit growth and the cost of deposits slipped down to $9 million. So good job. That was -- I think I commented a little more than that, but the more I hear it, the better it gets.

We've all been preparing for the worst and expecting the best. There'll be winners and losers as the strong ones separate themselves from the weak one. Over many years, Home has played in the "Underwriting safe game on both sides of the ball, offensive and defensively." Some of the investment community, has fussed at us or criticized us for a lack of growth. I can assure you sometimes doing the right thing can be much more difficult and lonelier than the easy way. Holding the course by remaining disciplined has certainly been one of those difficult times because it's so easy to fall victim, to follow the weak and do the silly stuff that others are doing.

I hear this all the time. 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 will not allow us to fall prey to the silliness of others. There is no right way to do the wrong thing. I plagiarized that by the way, that's not my quote, but I liked it when I heard it. So when you think about it, there's a lot of truth to that. There is no right way to do the wrong thing.

You're going to hear some GAAP numbers, some non-GAAP numbers out of me today, but you're really going to get to see a comparison between CECL and non-CECL. And I think that's important because the investment community has a difficult time unwinding all of this, the 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.

But here are some of the results of staying the course. Number one, a record quarter of pretax preprovision income -- preprovision net revenue, excuse me, PPNR. Record quarterly net income. That's not necessarily a GAAP, but you'll hear -- you'll see how I brought -- bring that in shortly. And as you heard from Stephen and Brian, margin's 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, we earned $0.47, and that's a 20% return on tangible common equity. But here's the real power of Home for the quarter, a record 205 -- excuse me, $102.5 million in pretax preprovision net revenue. That's a PPNR of 2.53% ROA. Couple that with peer-leading reserves of $238 million or 2.15%, I see some of them are catching up with us now. We kind of stepped out earlier last quarter. Add to that, our strong capital ratio plus our strong revenue forecast into the second half of 2020 and I think we have, again, positioned Home to continue to produce peer-leading performance into '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 a pan, but has been created over time with a planned long-term solid strategy. We have remained disciplined and continue striving to be the best bank in America. After Forbes named us the best bank in America 2 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 staying and remaining a high-performance bank is even more difficult. We've seen many overnight pop-up stars, but there's only a few of us that have continued to perform year-after-year. Home and a few others have led the bank group performance metrics for many years. I have no reason to believe that, that won't continue into '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 -- excuse me, this quarter, had it not been for CECL. But just hear the impact, so you understand what it does to the EPS and the ROAs of the company. We reported a return on asset of 1.55%, that's after the expenses of CECL. Actually, had we not had the CECL quarter, we would have reported an ROA of 1.92%. We reported EPS of $0.38. And we would have reported EPS of $0.47, and that would have been, as Randy Sims would say it, a world record. You don't like the world record, do you Tracy. That would have been a world record.

Net income was $78 million versus $62 million. We actually earned $78 million, but with the CECL deal, it's $62 million, and that's another world record. Efficiency, Donna, was below sub-40% from 44% -- to -- 44% down to sub-40%. Pretax net revenue, $102 million, that's another world record.

Return on tangible common equity. We reported $0.38 or 17.40%, which is pretty good. But actually, without CECL, we would have reported $0.47 and 21.63%.

Peer leading margins, as you heard from Brian Davis, margin was actually up, 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 and, I think, Tracy said, too, we're both pretty proud of it, over 400% coverage to nonperforming. And you heard Stephen reporting on deposits up $166 billion (sic) [$1.66 billion] for the quarter. There's a lot of banks that are not $1.660 billion. So that's $1.66 billion, that's pretty impressive. And even more impressive than that is the job that this team did on the cost of funds by lowering the price -- cost of funds by $9 million quarter-to-quarter. That's also another world record.

57% loan-to-value continues. We like our book. Not going to be many people willing to walk from that equity, but 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 4 -- $1.4 billion that has been reviewed in deferment are going back on P&I. That's probably pretty good news.

This is why Home is the best-in-class in all metrics. Even with CECL circus, we earned $0.38 and around 1.55%, in spite of the deference -- disappearance of $21 million that evaporated into the CECL circus tent. Most banks would be proud of those numbers at a 1.55% and $0.38 and we find them unacceptable.

I'd like to congratulate the House, the Senate, the President, SBA, the Fed, the Secretary of the Treasury, for an outstanding job on the creation and execution of PPP. I know it was work in process and there were lots of changes and lots of terms in that, and I suspect they'll continue more. But I am convinced this plan has saved many small businesses from failure. It shows how when we work together for a common cause, what can be quickly accomplished.

On the stock buyback side, we stopped buying back stock the day the President asked us to do that on television. The stock -- buying back stock puts bank stocks in serious jeopardy and totally at the mercy of the short whores. We all stop buying back stock and have policies on stock buybacks that 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 short whores. They will attempt to run the stock in the ground if they can make a nickel. These people add nothing to the world and are vultures that destroy the values of stocks owned by honest, hard-working Americans that do not have the time or the advantage of the lightning fast stock execution while they're working for a living. I'm asking our congressional leaders to ask the SEC to stop the shorting of bank stocks. They've done it in Europe, 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 million, that's over $410 million, plus our $238 million reserve, if needed, it gives us $648 million to handle future losses. That's not going to happen. But if it does, we're prepared to handle it. As of Sunday, July 12, at 6:42 p.m., as I'm writing this deal, I don't know $0.01 of loss thus far. I'm sure we'll have 1 or 2, but so far, so good. Anyway, we made the adjustment to cover anything that might come out.

I think it was Brian Davis that ran a model in the first quarter that if we charge-off $1 billion, we still hit all regulatory capital requirements, and that's not counting the $410 million in pretax preprovision earnings that we think will be coming into the shoe box in the next 12 months. Is that about right, Brian, was that pretty close? If we charged $1 billion, we'd still hit all the regulatory requirements?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Executive Officer & Director [20]

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Yes, sir, that is correct. I reran the numbers just the other day, and we're still at that same box -- same spot.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [21]

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It makes you feel pretty good to have the reserves we have, and know if we had to take $1 billion in losses, we're still in good shape. But I hope this provides some clarity into the crazy CECL model in the middle of the pandemic. Moody's never factored in to the model, as Kevin Hester has referred to, the $3 trillion plus in government support that's coming and with more coming. That in itself is probably a game changer. It's still a little dangerous to lend money in the middle of this crisis. Many lenders are loaning long-term with low fixed rates in the 3s and even some in the 2s. 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 piper. Writing 5-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 flooded the world with liquidity, what is that, that we slow inflation down there. 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 and 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 in 1998 for 4.11x book. Now that was not tangible book, that was total book. The bank was earning about $110 million per year. We sold it for 22.5x projected earnings. That was $120 million a year that was projected. And it brought about [$2.7 billion]. Try that and contrast that with today's market value environment. Home is a $16.7 billion earnings bank. And ex-CECL, is earning about $300 million a year with a market cap of $2.5 billion, trading not even at 10x earnings. If we were trading at '98 levels, our price would be [cash] less. Our book value is $15.06 times 4.11, comes out to $61.89 a share times 165 million shares gives us -- would give us a market cap of $10.231 billion, that's $7.5 billion more. This is what people have done to the banking system. They've robbed America's shareholders of billions of dollars to load banks down with additional expenses requirements and regulations, i.e. Dodd-Frank, and now CECL, is the next knife into the gut to kill bank earnings. I think it's time to quit picking on banks, banks are in the best financial position in my banking group. Some politicians have made their entire careers beating up banks. I guess it's fashionable and political to just hammer and hammer. Wells Fargo didn't help us either, and those guys ought to be tarred and feathered, and it looks like that may be what's happening to them.

To have the best quarter in our 20-year history, almost 21-year history, and in the middle of a pandemic, supports your strong belief in 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 bank have -- had been picked -- the banks have been kicked in the nuts so politicians, try to find you something else to do. And hopefully, we'll get rid of the shorts. In conclusion, great quarter from everyone, great participation from everyone.

And I think we're set for the rest of the year, Donna. 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.

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Donna J. Townsell, Home Bancshares, Inc. (Conway, AR) - Senior EVP, Director of IR, Executive Officer & Director [22]

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All right. Thank you very much for a glowing report. And Chuck, I think we'll turn it to you for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Matt Olney with Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [2]

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I want to drill down on the loan deferment commentary. And I realize it's still in the process or 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 the loan balances were deferred on June 30, I'm getting around $2 billion are currently deferred as of now, which represents around 16% or 17% of loan balances. Does that sound about right? And then part two, where do you see that number going in the future? What does the crystal ball look like?

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer [3]

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Yes, that sounds about right, with the knowledge that there's still half of the -- that $1.6 billion of that is still being reviewed, and we're not sure yet how that will turn out. But 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 is probably going to be at the end from $3.2 billion 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 probably carry forward for a second 90 days. So a 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.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [4]

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And then, Kevin, just to make sure I understand that right, that $1.0 billion to $1.3 billion that you mentioned, I guess that would be the number that -- 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?

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer [5]

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Yes. That would be our hope.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [6]

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Got it. Okay. That's very helpful. And then -- go ahead.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [7]

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It's tracking a little better than that, but hopefully, those will probably be -- probably be a $1 billion. I'm hoping for $1 billion. But it is what it is, right? If they haven't been able to open their hotel, it doesn't matter. We've got to defer them. The good news is we've been here before with these customers -- a lot of these customers from the level 5 hurricanes that have hit. So as Kevin said, we had the forms and the paperwork and 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 $0.01 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 thus, so far, so good.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [8]

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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? And did the bank see any strong growth in the unfunded pipeline?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Executive Officer & Director [9]

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I'll take that one, Mr. Allison. It's really a factor of 3 components. The primary factor is that our expected funding percentage went up quite a bit, and our loss rate went 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 relates -- 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.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [10]

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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 the bank put out 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 to some committees. Can you just add some context to the announcement in the 8-K you put out there back in April?

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [11]

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Yes, Matt, thanks for that. I had actually wanted to comment on that. The sale at the time was the -- Randy Sims, who was the President and CEO of the holding company resigned, I don't remember, in October or November. And actually, we didn't increase -- we didn't put anybody else in that role. I just assumed that role. I took -- 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 that aggravated at my bonus or something. They want some kind of matrix. I'm not sure what it is. When you run the best bank in America and we're 1 of the top 4 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 looked down on the shareholder list and I didn't see that they owned a 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 on 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 $0.01. 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 try -- we'll try to cooperate, but we have a business to run. We've been in the middle of a pandemic. We've come out of the worst financial crisis, 2008 - '09, in my business life, and we have to run our company the way we run it. So we made a few adjustments on the Board. But for someone to tell me to get rid of those 2 guys, one of them was the 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've talk to these people, and particularly the financial ones a lot, we've spent lots of time in talking online, off-line, wherever.

So anyway, I think it's a little unfair, but it is what it is. We'll try -- as I said, we'll try to cooperate but we have a business to run and we'll run it the best 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.

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Operator [12]

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And our next question comes from Brady Gailey with KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [13]

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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?

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [14]

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Unless something goes haywire, I think we're all -- I believe, we're over-reserved at this point, but that's okay. I mean it's -- 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's trying to find a bad loan somewhere. So I got a nice comment from somebody who just send it. He said, I agree you do run the best bank 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, you got any comment on what you see on the loss side or anything on building reserves?

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer [15]

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Yes. My comment would be that -- what's -- the models that generate what we put in reserve really talk about what we need. There's a disconnect there. I don't feel like we're going to need the 215 basis points at this point. But the models that are put in place because of CECL indicate that. And what goes in or out in the next 2, 3, 4, 5 quarters will all be determined by estimates of GDP and unemployment rate and things like that, not losses that we're seeing.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [16]

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All right. That's helpful. And then, I mean, such a strong quarter from Home. But I did notice, 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?

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [17]

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Well, we're loaning the money. We've had a couple of big loans that we did this quarter. It's -- it has slowed. I think it scared some people. It slowed a little bit, so -- which is not all bad, right? As Chris Poulton says, there's nothing wrong is getting paid off and sometimes you get paid off. So I just go back to the '08, '09, '10. I didn't care if I wrote another loan. The key was to remain stable and strong. That's when we did the efficiency deal, it protects your capital. And I think that's the time -- I think that's -- 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. Don't know if we're in a V or W. So it appears that most of our markets were in a V. There are 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?

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Executive Officer & Director [18]

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No. I agree. I think that we're seeing the loans. We're seeing the opportunities that are out there. We're, again, staying in our disciplined underwriting that's -- not winning all of them that are out there, the payoffs, it probably were a little bit more than what we thought during this time. Expect some of that to come down, but there will be some opportunities, too, as we go through the time period we're dealing with, that some of our excellent safe borrowers will restructure some stuff potentially. And we also have a lot of customers sitting in the wings to take advantage of any opportunity that's out there. I was speaking to one of our large relationships in South Florida today about the -- you would see some of the values decrease over this time, and he's ready to pounce if it has, but it's just been just the opposite. It's just -- the opportunities have not been there for some of our borrowing base that's ready to go.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [19]

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If you think about it, Brady, you got -- you got some stuff going on in 2% or 3% money out there. You're not getting paid for your risk. You're in a time you don't know if you're in a V or a W. It's a time to hold tight. It's the time to hold what you got, protect your assets, manage your business, the way we manage this company. And if we don't grow during -- for the next 6 months, so be it, we'll be fine. This company will continue to produce the numbers. I mean a little loan growth would be great, but we're not -- you know how disciplined we are. We don't get off of that discipline. Thank God, we never got off of that discipline. We were pushed and pushed to get off of that discipline, we never did. And I think the proof's in the pudding with the asset quality and the earnings and performance of this company.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [20]

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Yes. And then finally for me, I mean, Tracy and Johnny, I'm guessing M&A is dead in the near term or am I wrong?

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [21]

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Well, I keep -- a couple of analysts have mentioned some people having some struggles, some banks having some struggles. And it wouldn't be a bad time to look at one that was struggling. It's probably a good time to do that. The problem is you've got to buy it right. You've got to buy it right. You can't do a deal for the sake of doing a deal. You've got to buy it right 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 think people are more concerned at this point in time about business as usual, protecting our assets, getting their deferments -- their deferment 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, Home would do it. We're in a position to do it. We have plenty of capital to do it with. You think about if we can continue this run rate, as I said in my remarks, that's $400 million plus reserve of $230 plus million, and I can't imagine this ever even denting into that. But it is a sense of pride that we built a damn fortress balance sheet, and we like where we're sitting.

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Operator [22]

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And our next question will come from Jon Arfstrom with RBC Capital Markets.

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research & Analyst [23]

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A 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 if you can size that? How material is that?

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer [24]

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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 some of the customers, we targeted some out of that. And some of the customers that we've gotten out of it are going to turn into some significant deposit relationships. Some long relationships and -- I mean first thing we had to do is 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 -- at those points, we would send people out at the -- to the folks that they had targeted. But other times, we were making sure we could take care of our own folks.

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research & Analyst [25]

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And then on the deferral in terms of what's staying in deferral, you mentioned $500 million in hotel. Any other themes for what else is staying on deferral?

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer [26]

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I mean we've got a guy that has movie theaters. He's going to -- he'll probably be on a second deferral. And we've got some ALS that were 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 gets my attention.

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research & Analyst [27]

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Johnny, maybe another way to ask the M&A question that Brady asked. But from an industry perspective, I think we all understand your credit discipline. But from an industry perspective, when do you think we'll start to see industry losses happen and what categories do you think will see the most damage? And does that tie into M&A thinking at all here?

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [28]

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Well, I'm not sure you wouldn't be recognizing problems today. We know -- the good news about our customers is we know our customers. And we pick up the phone, as Tracy said, we call them and visit with them. So we're big enough to have a personal relationship with these customers. We're small enough to have a personal relationship with them, but big enough to take care of their needs. And that is one of the strengths of Home Bancshares is our customer base and the customers we deal with. I can't answer what other people are going to do. But I can tell you, again, we could have some loss and probably will have some loss. Our movie theater guy, if he doesn't get to reopen, I mean that's -- he could -- it's $4 million or $5 million, that could be a loss.

So oil and gas, it's come back a little bit. We only got -- total, Chris has got 50 and we've got 16 here. So that exposure is not bad. And oil's coming back a little bit and people are doing a little better. But from -- the hotels would be the ones that are going to continue, particularly, the airport hotels are going to struggle a little bit along. But as Kevin said, if they're 50% loan-to-value and we defer them for 6 months, then they're at 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 $0.01 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 lose $4 million or $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 a bunch. Actually, we have learned more than -- we learned a bunch deep diving in. So I can't answer that. I could tell you that if any banker, honestly, is looking at his book today, he would tell you he would be seeing and identifying problems in the book. And I can tell you, we do not see a problem in our book that concerns us at this point. Tracy?

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Executive Officer & Director [29]

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I totally agree. I think when you say when does banks begin to recognize it if we're doing our jobs the way we are doing it here, back to the basic banking, we're going to -- we're identifying things that have a -- an issue today. If it has some loss today, we try to identify it. And as Johnny said, so far, we haven't seen that. We mentioned the one credit a while ago. That's one isolated product. We don't have a certain class that we sit here and have identified saying, this is an entire portfolio. As we shared with the loans, and Kevin and his team did an outstanding job of bringing everybody up to speed, you got a better report on those today from Kevin. There are a few of those that's going to go through some challenged times over the next few months, but they have the wherewithal. I noticed on some of those extension credits. And again, we're trying to -- I can't say I look at all of them, but we're trying to, Johnny, most of the time. But some of those are certainly not in the need of another deferral. It's just that they want to continue to keep their liquidity in the position they are. They are in the position. Kevin mentioned, it's not anything that's going to make our loan at any more risk than probably what it is today. So it's a case-by-case. And I think banks should begin to recognize any potential loss over the next 3 or 4 months. If they are doing their job and doing it right, we'll certainly have that identified. When that happens, it'll probably be a little later.

Well, the good news is, I don't know anybody else that's running at 2.50% ROAs that Home's running pretax preprovision. I mean we're in a great position to -- if you're looking for banks who can earn themselves out of a problem, if there is a problem, this is certainly one that can earn themselves out of a problem. So overall, Kevin, any comment on that?

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer [30]

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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 subsegments of that asset class that are performing well. Our coastal properties and our extended state properties are both doing well. Coastal is 37% of our portfolio and extended stay is 27%. So you combine the two of those, that's really 2/3 of our hotel portfolio consists of two subsegments that are really doing pretty well right now and will outperform the others. So you really have to dig deeper than just making a broad brush across 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.

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Operator [31]

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And our next question will come from Stephen Scouten with Piper Sandler.

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Stephen Kendall Scouten, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [32]

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So a question -- just one more question maybe on the deferral process. I'm curious on the $1.5 billion. Was there any sort of concentration in terms of the loans that have been reviewed for that second deferral as of yet or policy on the terms of loan size or what's been reviewed, I guess, to date?

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer [33]

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I don't think I can tell you as far as -- nothing as far as loan size. I mean they're doing it largely based on...

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [34]

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Day.

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer [35]

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On the day. Yes, when the first ones came in, those are generally first ones they're 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.

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Stephen Kendall Scouten, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [36]

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Got it. And what is the process for those loans, I guess, on deferral now or that could get a second deferral in terms of potential downgrades, moving them into, what, special mention or anything of that nature? Are any of these within special mention today or would that transition occur with the second deferral potentially?

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer [37]

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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 a [4] if they weren't as a past watch already. They would at least go there. Some will go to the special mention, just based on what we see in the future prospects. So that's the process we're going through right now.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [38]

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Stephen, I know, Kevin is -- they've put together one heck of an underwrite. Just like reunderwriting a credit again with a lot more detail. He's got our regional markets that are reunderwriting the credit. And they -- if it's a certain size that goes to, we call it a fig type committee that works through with all of our senior leaders in the company. And then actually, 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 kind of like reunderwriting the credit again, and sometimes they send the lender back and get a little more information and get it a little direction on it. So its -- that's one of the things that been -- I personally have been really pleased with how they're doing that.

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Stephen Kendall Scouten, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [39]

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That's great. That's really helpful. And you guys gave color on -- a lot -- I see 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, healthcare, any of those other types of loan books that people are maybe slightly concerned about?

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer [40]

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That was -- I think the retail book and maybe one other segment were going to be the two segments we were going to tackle next in our series of visits. So we're probably a couple of weeks away from being ready to do that.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [41]

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You think that's helpful? Do you think that was helpful? On that, somebody said, I think Johnny just picked his friends, which was an insult.

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Executive Officer & Director [42]

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You have no friends. You don't have any friends.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [43]

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I don't have any friends, as Tracy said. That was -- I took that as an insult, they're all our friends. And we got a 100, 200 hotels. Whatever we got. I think we got a 100-something hotels.

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Executive Officer & Director [44]

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Yes.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [45]

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I mean I would welcome them to pick any one of those customers. We don't orchestrate a call like that. So it was -- that was a little aggravating.

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Stephen Kendall Scouten, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [46]

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I thought it was very helpful. I thought it was very helpful. I think we'd all been hearing kind of anecdotal stuff around extended stay at hotels and coastal hotels. So it's good to have some data points there that you guys gave. I appreciate it.

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Executive Officer & Director [47]

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Well, thank you. I'm glad that -- we'll continue as long. I mean Chris came back, someone mentioned we were worried about CCFG. He came back and did a report on CCFG and I thought that went well. I mean we don't -- unless something pops up, we have -- we don't -- as I said earlier, we don't see any problems, but there may be some. But anyway, we work hard at it. If it's beneficial to the Street to dissect that -- actually, the hotel book, as Kevin said, I mean our coastal hotels are straight up. Their revenue is better than it was last year, if you can believe that. People just got -- I guess, they get sick of sitting in the house and took off and went on vacation. So that area has been good. The Keys were a little late opening up, the Keys will be fine. That's one of the -- we've been in that market for many years, that one will be fine. So I worry about our airport hotels. However, air fare is picking up a little bit. So that might be better. Our I-40 -- our interstate hotels, our I-40 hotels, I-30 hotels have run, as Kevin said, about 40%. So that's ticking up, that's ticking up. So that may 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 on, 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 sit in here many a days just taking 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 the -- our lenders, and we'll reach out to make sure. So it's not anything as Kevin and Johnny pointed out, there's a certain class of credit that we're 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.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [48]

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Remember, Stephen, if you're 57% loan deposit and you have to defer them for 6 months, then you're at 60% loan-to-deposit. It's not the end of the world. Where we got in trouble in '08, '09 is we were loaning at 100%, and they needed money, we're going to be at 105%. So it's a different world. Plus you got the PPP money, plus you got lots of things helping and the federal government's helped a bunch.

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Stephen Kendall Scouten, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [49]

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Perfect. Maybe one last thing for me. It sounded like maybe this is more for Stephen. Stephen, a lot of the detail that you gave around June deposit costs and incremental declines there. And what feels like some relative stability on the average loan yields, do you think you can keep the NIM kind of in this range north of 4% in the months ahead, in the quarters ahead, that is?

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [50]

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Are you asking Stephen or me? Stephen is going to tell you it might drift a little bit. I'm going to tell you it's not going to. So go ahead, Stephen.

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Executive Officer & Director [51]

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(inaudible)

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John Stephen Tipton, Home Bancshares, Inc. (Conway, AR) - COO & Executive Officer [52]

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That's right. I totally said it last -- we gave guidance last quarter, it would go down, it went up. So I think I'll just keep saying it may go down. Certainly, in the first month or 2 of Q2, we're able to be really aggressive and sell some steep decline on funding costs. Still got them down a little bit in the month of June, but maybe at a little slower pace. But I think everything we see on loan yields, the yields on the construction balances yet to fund are 30, 40 basis points higher than where our book yield is today. The balances that we have coming due over the next 6 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. But if pricing is somewhat rational, I mean I don't 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.

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Operator [53]

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And our next question will come from Michael Rose with Raymond James.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [54]

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I just have one. I don't want this to turn into a world record for the longest earnings call. So I just had one question around buybacks. Obviously, probably on hold for now, but something like Jamie Dimon says, he hasn't ruled it out for the fourth quarter. You guys are clearly building a lot of capital if it's us and others' loss projections are wrong. You come in last. 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?

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [55]

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We're not -- I've just -- have been jumping to get back in. President Trump asked us not to do that, and we stopped that day. I didn't know if we were going to be penalized or get put into the penalty box for continuing to buy back stock. We have the ability to buy it back. I would like to be in the game to buy it back. I hate to be at the mercy of the shorts when we can't buy it back. I'd love to be back in the game, and I'm not going to rule it out either. I'm not going to rule out going back because it is something I think is -- has been good for our company, and I think it will continue to be good for our company. And we're building lots of capital. We might be able to go in and buy a bigger block at some point in time because it -- we're steadily building some capital. You're right.

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Operator [56]

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And our next question will come from Joe Fenech with the Hovde Group.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [57]

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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 had the upward revaluation in market values during the second quarter. Would you consider those markets 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 potentially more upward revision to come or are those marks kind of back to where they were pre-COVID?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Executive Officer & Director [58]

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The main driver in that is the fact that we have a higher-yielding investment still on our book versus what the market is. So we've been building our unrealized gain or loss throughout the year. It may level out a little bit, but that's pretty much the factor is that our rates that are left on the books historically are higher than what the current market rates are.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [59]

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Okay. But for the most part, the disruption from March, April has kind of settled down?

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Brian S. Davis, Home Bancshares, Inc. (Conway, AR) - CFO, Treasurer, Executive Officer & Director [60]

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That's correct. We took a little bit of a reserve on our portfolio in the first quarter. We ran that same analysis and probably didn't -- we didn't take any more reserve. It actually probably showed it was a little bit less than what we needed, but we put a management adjustment factor on it because Q2 didn't seem like the time to be reversing any reserves.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [61]

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Okay. Fair enough. And then, Johnny, correct me if I'm wrong, but the Liberty deal was the closest you guys came to a transformational acquisition in the last cycle in terms of size. Assuming you're active this next M&A cycle, should we expect more of the same? In other words, don't bet the ranch or your culture on any one deal? Or if things wind up right, could we see you do something or consider something more transformational?

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [62]

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I'm not afraid of that. I'd -- 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 in the due diligence. I don't know that we could do that. I would be hesitant to do a big deal. I wouldn't mind do it. As I said in the past, you can do a smaller deal and not hurt yourself. And we could do a $5 billion, 1/3 of our size or something that would be a pretty good size trade for us, but that wouldn't -- I wouldn't be afraid of that.

Probably bigger than that right now would bother me in the market. But as we get more clarity down the road from some of these other people to see what they're doing, and I don't know what their reserves are and we've looked at some different banks, and I think we don't have a lot of oil and gas exposure. Here's the key, what are you going to loan, what asset class are you going to put your money in? Credit cards? I mean car loans? Where are these people -- where are these banks putting their money, in what asset class? And there's risk in every asset class. So you just got to manage those classes well and know your customer and be able to pick up the phone and call them. I know I'm getting off a little -- little off track here, but I think it's a plus for Home Bancshares, 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 haven't, we want that to happen. So I don't -- I wouldn't be doing a big deal in this market right now. I think it was $5 billion or down, 1/3 of our size is something might make some sense. But I don't know if I answered your question.

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Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Managing Principal & Head of Research [63]

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All things equal, Johnny, are you still looking west or you'd be opportunistic around the southeast?

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [64]

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I would -- both, I'd be both. I'm just -- there's -- I want to see how this shakes out, Joe. We're not necessarily bottom feeders, but we've made a bunch of money over the years and helped build our franchise by looking at -- being 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 the way it's running and kicking out $300 million a year pre-CECL. I mean that's about the new numbers, I think Brian, I had him run a new forecast for me. And I think we were all over $300 million for the next 12 months, forget CECL. That, I mean, the timing of this CECL deal was absolutely ridiculous. And we're up and down and sideways. That pre-funded -- I mean the commitment on the unfunded, 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've just thrown in on top of banks. And anyway I'll hush. I've got a lot to say.

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Operator [65]

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And our next question will come from Brian Martin with Janney Montgomery.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [66]

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Just one -- couple of things for me. Just on the PPP. I mean do you guys -- I don't know what -- I guess, I missed some of what you said there, but just kind of the expectations as far as the forgiveness goes and kind of timing of that benefit. I guess, can you give any thought on how you're thinking about that, given the -- you haven't gotten a lot of clarity from the SBA?

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer [67]

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Brian, this is Kevin. I would expect a large, large percentage to be forgiven at this point given they've extended the covered period, they've made it easier, 40% can go to other things. All those things they did, improves 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 it's -- 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 to December that the majority of these are gone.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [68]

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Okay. So you -- I guess your hope would be, like it sounds like in that month of December, maybe forgiveness occurs. And so it's a fourth quarter event for the largest -- for a large piece of it and then some may extend out into '20 -- into next year.

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer [69]

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That's the way it seems to be lining up at this point.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [70]

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Okay. Fair enough. That makes sense. And then just how about -- maybe just going back to the margin for Stephen, for one second. Just as far as the 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, Stephen, when you kind of talk about big picture, maybe holding the margin, kind of where it's at, I guess, is that I guess I'm assuming that's with the liquidity sticking in there. I guess, just any thoughts on the liquidity piece would be helpful.

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John Stephen Tipton, Home Bancshares, Inc. (Conway, AR) - COO & Executive Officer [71]

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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 ex-liquidity or the impact from liquidity and PPP and other things. So I think that's kind of really what we're talking about.

We're -- we talk daily, I guess, from a liquidity standpoint. Brian and his team meet daily and weekly, but our exec group talks about things plainly. We've had -- probably let $100 million, $150 million go here recently that we were originally kind of proactively holding on to. We'll see some of this pair down with tax payments going out yesterday. So and I would expect at some point, what we feel like a good portion of the PPP balances maybe are still in the bank in operating accounts that some of that gets spent over time. 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 the [covenant] of where things go in the economy and what the governmental support is.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [72]

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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 $1 billion. It sounds as though you expect $1 billion -- you'll be left with $1 billion after those -- after you, I guess, take a look at how those are performing, how many of those are going back to payment. Is that what I heard you say?

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Kevin D. Hester, Home Bancshares, Inc. (Conway, AR) - Chief Lending Officer & Executive Officer [73]

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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, that stays on deferral. Whatever number that is will add to the $300 million that we've already identified in the first half.

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Operator [74]

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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.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [75]

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Thank you for joining. I know it was kind of a long call, a lot of questions, but 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 dividend, so don't worry about the dividend. The dividend is solid. So we don't anticipate anything there. We don't anticipate any losses to speak of.

And overall, I'm damn happy. I think we're -- to be in the middle of this crisis, I'm happy. I think -- and I thank you all for your support very much. It's important to us. And your input's important to us. If you have something you want to say about the asset classes or what we need, what the recommendation is, give Donna a call, we're always open to that.

So it was a great quarter. Performance was outstanding, and congratulations to the Home team. I get a lot of credit for being here, but it's really the people who run this company, Tracy and his group. And congratulations to you, Tracy, and your group. So you got any comments, Tracy?

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Executive Officer & Director [76]

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Thank you. Well said.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [77]

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We'll talk to you...

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Tracy M. French, Home Bancshares, Inc. (Conway, AR) - Executive Officer & Director [78]

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We'll continue to work hard.

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John W. Allison, Home Bancshares, Inc. (Conway, AR) - Co-Founder, Chairman, President, CEO & Executive Officer [79]

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We'll talk to you in 90 days. Thank you very much.

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Operator [80]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.