Home BancShares, Inc.

Good day and welcome to the Home Bank Shares, Inc. second quarter conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Donna Townsville, Director of Investor Relations. Please go ahead.

Thank you, Rocco. I am Donna Townsend, Director of Investor Relations, and our management team would like to thank you for joining our second quarter conference call. Reporting today will be our Chairman John Allison, Tracy French, President and CEO of Centennial Bank, Brian Davis, our Chief Financial Officer, Kevin Hester, Chief Lending Officer, Chris Fulton, President of CCFG, John Marshall, President of Shore Premier Finance, and Steven Tipton, our Chief Operating Officer. Before we jump into the numbers, I wanted to highlight a couple of developments that occurred in the second quarter. First, you may have seen our announcement earlier this week where Homes wholly owned subsidiary Centennial Bank announced the appointment of a new Director of Corporate Social Responsibility. This move highlights our intention to enhance the development of strategic initiatives supporting Centennial Bank's focus on environmental, social, and governance topics. While these pillars of corporate citizenship have always been important at Centennial, we feel like a more formalized program will ensure that we continue to keep ESG top of mind. Also, there continues to be discussion around fintech partnerships. Home recently joined in with 65 other banks to form an investment fund designed to help accelerate technology adoption at community banks across the United States. The partnership brings together seasoned fintech entrepreneurs and bank experts to invest in the next generation of companies, changing the way financial institutions and their customers move, track, and interact with money. These are just a couple of examples that show Home's desire to continue to be one of the best banks in America. Now, to transition to what you all called in for, our first report of the quarter will come from our chairman, John Allison.

Thank you, Donna. That's pretty exciting about the FinTech. That's somebody that had ESG for us. I think those are positive developments for our company. Good afternoon, everyone. Thank you, Donna. And, again, welcome to Home Bank Show's second quarter 2021 earnings release and conference call. The performance for the second quarter was another solid quarter for our company with $0.48 EPS and $71.9 million in profit, good asset quality, and decent expense control. Loan demand is the frustrating part of the equation. While sitting on $2.7 billion in cash and no reasonable place to invest for a decent return, we've decided to hold close and be patient and do not set our future. We may be wrong, but it is a decision that we made, and we're holding tight. If we're right, we think we're only six months away from raising rates, which may include an earlier period of time of tapering in purchases by the Fed. I pay a lot of attention to Jamie Dimon, and I agree with what he said. He's sitting on $500 billion, and he says patience is certainly the key here because rates are going up. As I said in the first quarter, we had to wind our back, and a lot of things that we've been working on came home to us. I meant that as a pun, H-O-M-B. During the second quarter, we had the breeze to our back with continued income from investments we'd made last year. Since going public in mid-'06, We together have been through the worst financial collapse since the Great Depression, and the worst pandemic the world has ever known may be worse than the one in 1970. By the way, as you well know, throw in a couple of hurricanes in Florida during that time. These huge events created fear, uncertainty, and lots of anxiety for all Americans as well as people throughout the rest of the world. I want to thank you all for your support during these very difficult and stressful times. In addition to all the events that happened, we were going over $10 billion and incurred an addition of $2 billion. How funny is that? We blew through $2 billion, but $10 billion was a big mark for us. And all the associated expenses, the adjustments for $10 billion took us longer and cost more than we ever anticipated. New terms to our vocabulary like enterprise risk management, CFPB, bank secrecy, just to mention a few. Actually, one exam, less than five minutes, the next exam was spent on capital, earnings, asset quality, margin, and liquidity. I thought these were the most important components to running a successful and profitable banking organization. The other 50 minutes was spent on things I'd barely heard of for the last four or five years. Through all the unseen and crazy times, Home has continued to produce peer-leading results with ROAs running from 180 to 190 and some over 2%. We have managed her through the crisis regardless of pandemics, hurricanes, or COVID-19 viruses. Whether the business was good or bad, regardless of interest rates going up or going down, or adjusting to what plan of attack that our management decides on, that's what good management teams should be doing. Let's take a walk back over the last three and a half years, 2018, 2019, 2020, and the first half of 21. And I think you'll agree with me that the consistency of homes earning is impressive, even without all the unusual circumstances we found around us. I'm going to read 2018, 19, 20, and 21. So in 2018, we did a 209 ROA. These are adjusted numbers. We did a 209 in 2019, a 196 in 2020, a 192 in the first six months of this year, a 197. That converted into income of, in 2018, $303 million, in 2019, $294 million, in 2020, $309 million, and the first six months of this year, $167 million. The total revenue net after interest expense was $663 million in 2018, $662 million in 2019, $694 million in 2020, and $365 million in 2021. You know, I think you have to agree with me that these numbers are pretty impressive and shows the stability of this corporation and how the management team adjusts to the situation today. that's in front of us. I cannot ask for much more performance than those impressive numbers. As a result, we decided to pick up our M&A tool out of the toolbox. We've worked on a couple interesting opportunities, but to no avail so far. I was visiting with a very smart, good friend in the money management space, and I was telling him the difficulties we were going through. I told him, I said, it appears The bankers are screening all banks to see who can pay the highest price, and then they go out to potential sellers and say, hey, look how much home could pay for your bank or someone like home. There's not many like home, but there's a few of us that trade at a pretty high multiple tangible book. It's almost like a pocket listing that a realtor has when the potential seller says, well, my home's not for sale, but if you can get somebody that's crazy enough to pay this price, He said, then my house will be for sale and you can sell it. Kind of like a real estate pocket listing. My friend laughed and said, they don't work. And I said, what doesn't work? He said, the M&A deals just don't work. He went back to 2010, looking at all transactions, and there were very few that worked. Very interesting comments. He said, on announcement of a deal, Bank A buying Bank B, he sells the seller immediately. and shorts the buyer. I said, why would you do that? He said, well, that's probably the highest price that the seller's going to have. Can't expect it to go up because it's tied to the buyer's price. And he said, besides that, I don't get paid until I sell and cash the money out. He said 98% of the deals are diluted to the buyer. If it's a three- or four-year earn-back to a tangible book, why would I sit around for four or five years waiting for that earn-back to come back to get some money back to even? The only deals that make good sense are non-dilutive transactions that have all the deal costs calculated into the transaction and experience acquirers. He said, you'll never hear this from an investment banker, but remember, they get paid whether it works or it doesn't work. He said, keep your discipline. Why do you think they want to do a transaction with our own? It's because your stock is good. And why is your stock good? It's good because you're disciplined. Why are you disciplined to make your stock good? It makes lots of sense. Another interesting point that came from the matrix of the deals is the higher price the tangible book paid. It had a run from like one four times tangible book all the way up to two three times tangible book. And the higher the tangible book multiple, the longer the market punished you and put you in timeout. And in some cases, it was years. because they're waiting on the Earn Back the Tangible book, and nobody wants to hang around for that because nobody keeps up with it and nobody calculates. We'll continue to look for like-minded partners in the space in addition to this one, the integration risk. However, a lot of that integration risk can be mitigated when you find like-minded partners. Dilution is the killer. If a buyer dilutes himself today to buy your book and has a four-year earn back to tangible book, don't you think he'll do it again before four years and again and again? It is conceivable that you may never get your tangible book back to where you started. One way to look at it is home's market cap is $4 billion based on a multiple of tangible book. If I dilute my shareholders by 5%, I've just reduced the value of my company by $200 million. Now, that tells you why smart money managers short the buyer, because if it's a diluted transaction, the company is not worth today what it was yesterday. If there is no dilution, there is no reason to short the buyer. Let's say that again. If there is no dilution and it's an accretive transaction, there is no reason to short the buyer. If the company has local shareholders, And it's private. The odds of negative treatment by the market is substantially reduced. If a company's owned by a bunch of hedge funds, it really complicates the transaction even more because they're gone by daylight. If it's announced today, in the morning they'll be gone. They all sell. To me, sophisticated bank investors, individual investors, pension funds, quality portfolio managers, and ETFs, and then there's the hedge funds. It's important to analyze the stockholder ownership, before engaging in a transaction. We still are engaged on the M&A, but are looking for other opportunities that could increase our earnings. We have a $300 million sub-debt that is callable in April at $5.625 and $71 million worth of trust preferred. We have been putting back $5 million a month, and in April we will have $150 million set back. We may request, I don't know, Tracy, you think about requesting the very latest allows to do a special dividend. Is that correct? Working the numbers as you speak. We're working the numbers. We're going to send them to them. So we may request a special dividend, and if they were to approve that, then we could pay off the entire debt. That's about $17 million pre-tax, and it runs at about $0.08 EPS. That's without doing the trust preferred, and we might save those and do them at a little later date. But all told, we're doing both. That's about $0.09, maybe $0.10. I would anticipate us engaging at least on half of the subdebt and maybe all of it, probably all of it. With inflation running at historic levels, I guess you saw June. It was up $0.09. June was $0.09. May was $0.05. So that's 1.4%. in 60 days. Kevin, would you say that equated to?

Almost 9%.

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

Well, that was insightful as always, and I also hope that we're not looking at a big surgence of the Delta virus either. So now we will move over to Tracy French for Centennial Bank.

Thank you, Donna, and good afternoon to everyone. Steady as it goes in the second quarter for Centennial Bank and home bank shares, maybe steady and consistent is more accurate. And that steady and consistent is our performance expectations. Our group will share with you in a moment some of the details about capital earnings assets liabilities. Here are a few strong and safe performance numbers for the first quarter and the first half of 2021 for Centennial Bank. It represents all regions that just keep producing such powerful results. In fact, eight of our 12 regions had their best six months ever, led by Central and South Florida, while others are still doing extremely well and still complaining about our transfer pricing internal model, where their numbers would be better. And we understand that. For Centennial Bank, our total revenue was $367 million for the first half of 2021, making a return on assets of 2.08%. Our return on average tangible common equity non-GAAP was 19.66%, and our efficiency ratio is at 38.59 for the first six months of 2021. The Allison P5 NR is still above the 60% level, coming in at 61.99% for the first half of the year and holding that number throughout the quarter. A nice factor being our net interest income by the efforts of all focusing on our interest income and interest expense. Our non-interest income is actually up over double digits for the first half of the year, while our non-interest expense is up slightly. Brian will give more detailed information on our strong capital as our risk-based capital reports at 19.5%. Stephen will share the detail of the loan production and the deposit summary. As Johnny mentioned, it's now over $2.7 billion in excess, and our loan-to-deposit ratio is around 73%. Kevin will share the loan information as it continues its safe and sound numbers. Our non-performing finished the quarter at 0.58% to loans. Our allowance for loan and lease losses, excluding PPP, ended the quarter at 2.48%. Quarter end shows our allowance for credit losses to loans to non-performing is 407.99%. When we saw an expected dip in overall loans, who would have thought a 1% annual percentage rate on PPP loans would be good? And twice the return as a three- or five-year treasury. Let's look out. Rates have gone up 50% to 80% over the past month. So, Johnny, my forehead comic rubbing is looking promising going forward. Inflation is receiving a lot of attention lately, as we discussed nearly this a year ago, as we knew that by staying in touch with our customers on these factors. We will continue to stay the course. As we have said previously, we have made conscious decisions to sit in cash with our asset growth, and it appears the signs are showing some positive movement in the second half of the year. The first half of the year turned out the way we thought, and most of our markets are seeing good, solid growth through the swing of this other side of the cycle that we're going through. We have stayed committed to our strategy and discipline to make decisions for – not to make decisions for short-term gain that could affect our company long-term. I trust that our long-term and loyal shareholders appreciate that discipline. Donna?

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

Thanks, Donna. Today we reported $141.3 million of net interest income and a 3.61% net interest margin for Q2 2021. Our second quarter net interest margin decreased 41 basis points from Q1. Today, I'd like to go over two items which significantly contributed to this decrease. First, during the second quarter, we had 247 million of PPP loans forgiven. This forgiveness causes the acceleration of deferred fee income for the loans forgiven. Our PPP deferred fee income decreased 3.5 million from Q1 to Q2. This decrease was nine basis points diluted to the MIM. Second, the COVID-19 crisis and the resulting governmental response has created a tremendous amount of excess liquidity in the market. As a result of the excess liquidity, we had $967 million of additional interest-bearing cash in Q2 compared to Q1. The excess liquidity was 23 basis points collusive to the Q2 NIM compared to Q1. From a point of historical reference, The Q2 excess cash versus the historical normal cash balance has a negative impact to the Q2 NIM of 63 basis points. Once again, that's 63 basis points negative impact to the Q2 NIM because of the excess cash.

So what would that be? I mean, how much would we come up with? What would it be in our forehead here?

361 plus the 63. It'd be 420, right?

Somewhere in that range. 424. That doesn't trace you rubbing his head again, does it?

Now I'll switch to the unfunded commitments. This quarter, the company reversed $4.8 million of the unfunded commitment reserve liability. This reversal was primarily related to one CNI loan. During Q2, the company determined it was not necessary to maintain the reserve on this cash flow and credit. I'll conclude with a few remarks on capital. Our goal at Home Bank Shares is to be extremely well capitalized. I'm pleased to report the following strong capital information. For Q2 2021, our Tier 1 capital was $1.8 billion. Total risk-based capital was $2.2 billion, and risk-weighted assets were $11.5 billion. As a result, the leverage ratio was 10.9%, which is 118% above the well-capitalized benchmark of 5%. Common equity, Tier 1, was 15%, which is 131% above the well-capitalized benchmark of 6.5%, while Tier 1 was 15.6%, which is 95% above the well-capitalized benchmark of 8%. And finally, total risk-based capital was 19.5%, which is 95%, above the well-capitalized benchmark of 10%. I think we have plenty of capital today, Mr. Allison.

Wow, that's pretty impressive. It may bode well for you, Tracy, when you ask the regulators to help us move this money up. It should be in good shape. It should be in good shape. Thank you. That's good. That's all I've got. I'm going to turn it back over to you.

Okay. Thank you, Brian. Now, Kevin Hester will update us on the loan portfolio.

Thanks Donna. The first half of 2021 was much like we anticipated. We've been fully engaged in PPP with forgiveness of rounds one and two and funding around three with both going largely as expected. Credit metrics continue to improve slightly, even when it appears there's not much room left for improvement. New lending opportunities have returned, but the excess liquidity and low loan to deposit ratios across the banking industry have resulted in even more irrational pricing and underwriting. So growth is elusive. We've said all along that we felt that it would be the second half of 2021 before we could see any loan growth. And we still feel that way. The good news is that our production pipeline is stronger today than it was 90 or 180 days ago. To the specifics. In the area of PPP, round one and two balances have been reduced from the original $850 million to just below $150 million. with still over 99.5% of the requested balances being forgiven. We've seen the SBA release funds on a good portion of the round one and two loans over $2 million in the second quarter, which has been helpful. We will make a hard push to submit the remaining round one and two balances this quarter. Round three funding ended during second quarter and we funded just over $350 million or about 40% of the total of rounds one and two. We've initiated the forgiveness process on a few of these as well, and have received about $30 million on these balances in a very short amount of time. COVID modified loan balances remained flat during the second quarter and ended June at $265 million. As we discussed 90 days ago, little change was expected in early 2021 because a large majority of these balances were placed on an 18 to 24 month interest only modification. to provide sufficient time to recover from the remainder of the pandemic. Roughly 70% of this balance is hotels and the recovery is definitely underway with virtually all the modified properties experiencing a significant improvement in cashflow. It appears that as much as two thirds of the modified properties experienced at least a breakeven rev par in the month of April and May. I would not be surprised to see a good portion of these loans, especially the Florida properties, return to P&I payments at some point during the last half of the year if positive cash flow continues. Remember that we stipulated no disbursements as long as they were on interest only, so the incentive will be there to go back to P&I payments once positive cash flow is sustained. There's even good news on the movie theater customer that you've heard Johnny discuss from time to time. He has received notification that he will receive funding from the shuttered venue operator grant and it will likely be sufficient to get him back on track with us. As I mentioned, credit metrics continued to improve in the second quarter. As Tracy mentioned, non-performing loans improved to 58 basis points, only up five basis points pre-COVID and down one basis point on a linked quarter basis. Non-performing assets are even better at 35 basis points, down nine basis points pre-COVID and down three basis points on a linked quarter basis. Early stage past dues remain very low at 41 basis points, which I believe is the lowest figure we have achieved in recent history. These measures are even more impressive given the lower loan balances in the last couple of quarters. On the technology front, we're in the latter portion of the build phase of an end-to-end commercial loan origination system. We anticipate the go-live date to be early fourth quarter, and we expect to gain efficiency as well as visibility and control. It will also provide the platform for growth and sustainability as we continue to evaluate M&A opportunities. Overall, the second quarter of 2021 was very much like we expected when we visited back in April, and it feels like we're getting back to normal except for market pricing and underwriting. With that, Donna, I'll turn it back over to you.

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

Yeah, when you said a hotel you're in, you said the golf tournament. Talking about his hotel, big Florida hotel. And I think that he said, oh, Johnny, he said, we are 100% full. He said, cramp back full. He said, somebody cancel, you don't have to worry about it. He said, marina's full. He said, the hotel's full. I said, how about the rags? He said, they're up a little bit. He had a pretty good smile on his face, Kevin. Good.

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

Thank you, Donna, and good afternoon. CCFG generated modest growth during the second quarter of about $40 million. We ended the quarter with loan balances of approximately $1.56 billion. I'd note that this number does vary over the course of the reporting period, along with the timing of draws and paydowns, etc. So by way of reference, our high balance during the quarter was $1.68 billion. Increased economic activity during second quarter, especially in New York and California, is starting to show up in our production and loan pipeline. We saw sales and rental activity and pricing picking up throughout 2021, particularly in New York and California markets, which are joining them already active markets in Florida, Texas, and the Mountain West. We'd expect this to lead to more opportunities in these markets, but we also expect that we'll see some payoffs accelerate during the second half of the year as our borrowers are able to complete their exit strategies. New loan commitments for the quarter were $213 million, and that brings us to a total of about $430 million year to date. That number is in line with both our 2019 and our 2020 first half production. As you might expect, in 2020, second half production was impacted by the shutdowns. We don't anticipate that for 2021, and we would think that the expansion that we're seeing now will also help us increase that commitment volume through the rest of the year. Unfunded commitments stand at over $800 million at quarter end. That's a bit higher than we've carried in the past few quarters, and I would hope that this build in future funding will help us offset some of the potential higher payoff volume over time. Overall, the second quarter continued the trend we've experienced in Q1, which were markets are reopening, activity was increasing, particularly sales and rental volume and prices in New York and California that had lagged behind some other markets. We are seeing both an increase in the number of new leases and the number of sales in those markets, and we are seeing prices start to rebound. We remain pleased with the size and quality of the existing portfolio and the makeup of our pipeline, where we have several loans in closing and late-stage underwriting. While markets are recovering, we do continue to see that it takes a bit longer than usual to close loans. Particularly, the time from term sheet signing to closing remains several months longer than our historic norms. I'd expect that this will moderate over the remainder of the year and start to return to our historic timelines. Donna, happy to turn the call back to you.

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

Thank you, Donna, and good afternoon. I'm pleased to report the second quarter of success for Centennial's Marine Finance Lending Unit as we explore the new post-COVID realities. Retail applications have moderated to 120 per month from a COVID peak of 210 per month, more a function of limited inventory available for sale rather than the satiated consumer demand. Interestingly, and I suppose in support of inflation hawks, our average application amount has grown from 504,000 pre-COVID to 657,000 in this June just ended. Pre-owned vessel finance now comprises 68% of our applications. That's year to date versus 52% in all of 2020. So we've moved from 50-50 new to use ratio to closer to a 30-70 split. as a new product just isn't available. We've addressed the collateral value risk by managing down our loan to values from an already conservative 71% pre-COVID to 66% in the past quarter. Second quarter retail production was a near record setting pace at $59.5 million. Our commercial business continues to shrink as sold inventories cannot be replaced due to suspended production in Europe last year Supply chain gaps due to labor shortages and limited shipping container capacity. Just to fight strong production for the quarter, our balance sheet contracted by $36.7 million as businesses spend stimulus money and consumers use stockpiled cash or newfound home equity priced at 2.5% to reduce their more expensively priced boat loans. Free payments in the second quarter were the highest in the past two years, swallowing $55 million in interest-earning assets. We're seeing some evidence that the prepay cycle may be slowing, and despite of, or perhaps because of, our falling asset values and disciplined expense management, our contribution to Centennial's bottom line has grown year over year, as our efficiency ratio is below 18%, which has lifted ROA to 2.7%. And Donald, while the prepay rate is frustrating our growth goals, the good news is that we are replacing prime assets with prime assets, Origination FICO's pre-COVID were $778, and last quarter held steady at $777. Additionally, we have no COVID-related impairments or deferrals. Non-accruals reached a three-year low of $1.6 million, and our accruing delinquent loans have been hammered down to 13 basis points. I believe we're well-positioned for growth once surplus cash has been exhausted and factories resume shipments. On that note, Donna, I'll return the call to you.

Thanks, John.

That was a pretty good report, Donna.

It was a good report.

Good job, John.

Very good report. And for our final report today, we will turn to Stephen Tipton.

Thank you, Donna. I'll give the standard color on deposit activity, repricing efforts, and trends, and a few additional details on the balance sheet. On the deposit side, core inflows continued during the second quarter of 2021 and as total deposits increased $379 million from $331 to just under $13.9 billion. Four Florida regions accounted for $263 million, or 69% of the increase in the quarter. Our Florida franchise now accounts for 52% of the total deposit base. Focusing on our core base, non-interest-bearing account balances increased over $200 million on a linked quarter basis and now stand at over $4 billion, or 29% of our total deposit base. Switching to funding costs, interest-bearing deposits averaged 26 basis points in Q1, down 7 basis points on a linked quarter basis, and exited the quarter in June at 25 basis points. Total deposit costs were 19 basis points in Q2, and were down to 17 basis points in the month of June. CDs are now at an all-time low at 7.7% of total deposits. We're continuing to work deposit rates down where we can as liquidity levels persist. In addition, we're continually evaluating our product set and commercial fees to align with the market and drive additional revenue in this low interest rate environment. I'm pleased to see the efforts over the past few quarters here begin to show in the bottom line this quarter. Switching to loans, we saw total production of a little over $700 million in the second quarter, with nearly $400 million coming from the community bank footprint. We continue to monitor the competitive environment and focus on the disciplined approach to pricing and underwriting that has long served us well. Payoff volume was in line with prior quarters at $882 million, as we again saw borrowers continue to liquidate large assets and or go to the permanent financing market. Brian mentioned in his remarks, when normalizing for the impact from PPP, event income, and a tremendous amount of excess liquidity, we're pleased with how the net interest margin continues to hold up. And with that, I'll turn it back over to you, Donna.

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

No, it was a good quarter. Those were interesting numbers. It's interesting times with all this liquidity. I mean, we used to run 105% loan deposits. We call it running hot around here. Now we're over at 75. So, you know, if the market picks up, we're certainly in a great position to, if we can deploy that money into loans at a reasonable price, I think it sets us up pretty good for the year. So we're continuing to hang in, and I think that all good reports from all parties, and If Rocco hadn't gone to sleep on us, Dawn, I think we'd be ready for Q&A.

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

Thank you, ma'am. We'll now begin the Q&A session. If you'd like to ask a question, please press star then one on your touchtone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Michael Rose at Raymond James. Please go ahead.

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

Well, we're active. We're very active on M&A and probably further along on an M&A deal at this point in time than we've been in some time. So, you know, you find like-minded people like we are that run good operations and understand what dilution does to a deal. When you find those kind of people, then you can make the trade that makes sense. Instead of everybody bombing the stock, it ought to have some appreciation, particularly if we bring one in at AAA. And, you know, we don't do them without them fitting that mold. So we're excited about what's going on in the marketplace, and we think we've found at least one group of people that are like-minded to us, that are interested in the long-term future of the value of their company, that understand what dilution does. And those that don't understand ought to understand, but That part is a little frustrating. Our stock was, what, 2.7 times tangible book, and the bankers were saying home can pay you some big number, and home could, but home doesn't. There's a reason home trade's where it is, and you know that, Michael. It's a discipline of this company, and when you find, as I said earlier, you find like-minded people, I think you can see a nice trade coming off for home, hopefully.

Great. Maybe just as a follow-up, so the NIM compression was, even on a core basis, was a little bit more than I think what me and others were looking for. Do you think we're nearing a bottom here for the core NIM, kind of ex the PPP and execration, if we think about it that way, or? Are we still going to be subject to some ongoing pressures when we move forward, just given the lack of loan growth opportunities? I know you guys are super disciplined on pricing and things like that and aren't going to, I think in your words, Johnny, push a rope. You said in the past, but we'd just love some color on the margin dynamics as we think about the next couple quarters. Thanks.

Let me just give you an example. One of our regions called Tracy yesterday, and somebody quoted three and a half fixed for seven. And the next guy said, well, I'll tell you what I'll do. I'll do 3% fixed for 10. And the other guy said, well, I got the loan now. I'll do it at 2%. So it was absolutely a race to the bottom. And when you see that kind of stuff, it really gets frustrating. That impacts the NIM. We're not playing that game. But I don't think the NIM at home, other than the excess liquidity, has really been hit. Brian, am I right?

Yeah, I would agree with that. You know, it's the excess liquidity that's cost us 63 basis points on our margin from Q2 based on the excess liquidity that we have. You asked the question if it was going to be excluding PPP. You know, for reported NIM, we might still see a little compression because we reported 6.3 million of PPP income this particular quarter. And just for a point of reference, there's 18.2 million of it left. So it'll be difficult to continue at the $6.3 million because some of the round two forgiveness is five years, and there's not a tremendous amount of the round one left. So that will kind of die off a little bit. Will we continue to build excess cash? So far for the first 15 days, I'm going to go with no. Our deposits are functionally exactly flat from where we are. at the end of the quarter. So, you know, we really won't receive any more pressure there. It's just a matter of what we'll decide to do in deploying the excess cash, because if we deploy it anywhere, it's accretive to the NIM, although I would like to go on record that it's going to go down, because I'm usually wrong, and so it would – I would probably jinx myself to say that it might improve. But it – It really shouldn't bottom out there on what we have from excess cash unless deposits just continue to come in. But just keep in mind, if we move it out of the Fed, which has earned 15 basis points, and just move it to 1% and something easy in the investment portfolio, that is technically accretive to the margin. And I know Stephen's sitting here by me, and he's got a a few things. He may want to add some more color to that on the NIM himself.

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

I think some companies have pushed off some of that excess liquidity. We haven't. We haven't pushed it off. We could push some of that off and then bring it back, but that's kind of a game. It just is what it is. At some point in time, we'll be able to deploy that money, and when we get an opportunity to deploy it, I think it'll be – you know, time will tell. Tracy's rubbed. Most of the hair off the front of his head turned throughout what to do with this $2.47 billion. It was a billion, then a billion, five, then two, now two, seven. He didn't have near as much hair left there as he used to. You got a comment on that, Tracy? It's cheaper at the barbershop. Hey, Michael, the list of questions you sent were great. Those were really, you talked about a thorough set of questions. Those were really excellent.

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

I think that's fair. We have a 10-10 call daily, every day, 10-10, and we're discussing what to do with this money. But actually, I'm not going to predict loan demand going up because every time I do, it goes down. But you heard Chris talking favorably, and you heard John talking favorably. You heard Kevin talking favorably, and we had a good executive loan committee yesterday with about $100 million. You know, I'm optimistic that maybe things are turning around a little bit. We have a lot of stuff working, lots and lots of big loans working that just hadn't come to fruition. And I asked Chris, I said, what's the problem? And Tracy, it's taking longer to close these loans than we anticipated in the past because a lot of municipalities are involved, and they're not working full staffs. You can't get the information you need, and they can't do a check on the progress. So it is a little frustrating, but that too shall resolve itself.

Okay. Thanks for taking my questions, guys. And, Tracy, I got an extra sport haircut coupon if you need one. Just let me know.

Thank you, Michael.

He doesn't need one, Michael.

Our next question today comes from Brady Gailey at KBW. Please go ahead.

Hey, good afternoon, guys. One more on the topic of loan growth or the lack of loan growth. Is it more truly a loan demand issue or is it more you don't want to lend at today's rates? I'm trying to figure out how much of it is truly loan demand versus home being thoughtful and saying, hey, I'm not going to put on a loan with a two or three handle.

Hey, Brady, this is Kevin. It's a mixture. Things are coming back in Florida, for sure. Arkansas is a little bit slower. But, I mean, it's more than just interest rate. It's leverage, too. We're seeing, I think, particularly in our community bank markets, in the smaller markets, our smaller competitors are doing some really crazy stuff on leverage as well as rate. So, yeah. You know, you can play with that rate a little bit, but we're not going to do crazy stuff on leverage for sure. Not with prices as high as they are for all assets.

We're seeing some 95 and 100 cent stuff that just doesn't make any sense. And that's just people getting too aggressive, taking a loan that needs to have recourse on it and making it non-recourse. I think there's a panic in the world out there. You know, home's not panicking. We've got a great company. We may still make a lot of money, and even with all this excess liquidity, so we're going to hold tight to what we do, what we've done the entire time, and I think in the long run, home will win. You know, you can change. You can fix about anything with a bank except the margin. It takes years to fix a margin. When you do seven- and ten-year fixed-rate stuff out here at low rates, you're going to be living with that for a long time, so. We think we're on the right track. I don't believe the Fed can, as I said last quarter, keep their foot on this inflation. I know Powell's trying to convince the world he's going to do that, but I'm afraid he may have gone too far. So this thing could get a little crazy here for too long if things don't change. Hopefully the Fed will taper a little bit and we'll see rates start ticking up a little bit. I mean, you bought gasoline and food lately. You know what I'm talking about. I get it, used cars are up 40%. That could come back. It probably will come back at some point in time, but it probably won't until the new car business can fill the needs that's out there for the demand.

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

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

Yep. All right. And then lastly for me, it looks like you bought back maybe a little bit of stock this quarter, but your stock has pulled back a little bit. It's now trading at 225 times tangible today. which is pretty attractive to you guys. So just, you know, did you buy that stock at your quarter? And talk about your appetite for continued buybacks from here.

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

Yeah, we bought about 600 and a little over 600,000 shares in Q2, and then we've got a 10D51 slant in place at the end of the quarter that's been – pretty active the last two weeks or so.

If we hadn't had the 10B5, our hands tied, you'd probably see us in there with both feet right now. Yeah, we have bought stock and we'll continue to be in there.

Okay, great. Thanks, guys. Thank you.

And our next question today comes from Matt Olney at Stevens. Please go ahead.

Hey, thanks, guys. Good afternoon. Hi, Matt. Hey, I want to go back to the discussion of the loan balances, and I think Tipton gave us the overall level of originations in 2Q. I'm trying to appreciate if there was any kind of deceleration or acceleration from the April to June timeframe within that.

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

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

No, not necessarily. You know, $700 million has been Last three quarters or so has been pretty consistent. You know, we generally fund about half of that. At quarter end balances, about half of that was funded.

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

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

Yes, sir. You know, we continue to, again, I think we said this last quarter, too. I mean, we have a nice backlog. We're underwriting deals. We're signing them up, and we're getting them negotiated. Kevin mentioned, you know, that, I mean, in June I had two deals I fully expect to close in June, and one of them has been sitting with documents in escrow for two weeks waiting for somebody from the city to finally get back to work. But I assume they'll do that. I hope they're not listening right now. But – If they are, I love you. But, yeah, I mean, we're just seeing stuff, you know, we're just seeing things just take a while. I mean, you know, closing a loan is a, you know, is a nine, ten party affair. And, you know, I think we hear people saying that they're more productive working remote. I think that might be true individually, but not when you need to get six, seven parties together to get something done. It's just taking a while. So, yeah. None of the ones that we have in there look like they're going to fall out because of that, but it is frustrating to sit there and wait for these things to close. If nothing else, it's because, you know, every day I don't have it closed, it's a day less I'm earning. But we still have confidence they'll get done, and these are usually outside our control and the borrowers, you know, or even outside the borrowers' control sometimes. So, you know, I think everybody's I think everybody's looking forward to getting back. It does help that New York has reopened now. I mean, as of July 5th, right, the city's reopened in terms of all city employees have to be back and those types of things. So I think we are seeing it. I think we are seeing things start to accelerate. And I know we are getting to the point now where bars really want to get these closed. So, you know, we'll hopefully get through those this quarter.

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

Yeah, I'd like to have net loan growth. You know, a lot of that's going to be timing oriented, right? I mean, I think we ended the quarter, I think I mentioned in my comments, you know, for a good part of the quarter, we were sitting, you know, probably 16, 1650. You know, we end up at 1550 or 1556. I'm back up over $1.6 billion today, for instance. So some of that's just what happens. When do you get the pay down? When do you do the funding? It moves around by maybe $100 million here or there. We are starting to see unfunded balances grow, which is good because that's future funding that will come through. Whether that future funding comes through before the payoffs come through or as they do, over time that will all settle out. whether at next quarter end, what's that number going to look like? I don't know. We are seeing some payoffs. I have some expectations of some payoffs because we have borrowers who have a plan And they weren't able to execute that plan as well as they'd like to under COVID. And at some point, I do want them to, as much as I love them, I want them to go away. And so we do have a couple that I expect this quarter that will execute their plan, have executed their plan, and they'll take their permanent financing now. And it's a good market for them, right? We want that for our clients as well. They're gonna go out and get permanent financing. It's a good market to do that. You know, it's the flip side of that, which is they can go out and get good long-term financing right now. And so, you know, we want them to do well as well. So I expect we'll have a few do that. You know, one of them is one that we thought would probably pay off They get their TCO, they lease up, probably pay off towards the end of the quarter, and they're probably going to pay us off this month because they're not at TCO yet. But, you know, they're going to get permanent financing pre-TCO, which is not unusual today.

Got it. Okay. Great. That's all for me. Thanks for taking my question.

Thank you, Matt. Next question comes from Steven Scalton with Piper Sandler. Please go ahead.

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

Yes. all the above that you mentioned there, we have done some of the bank sub debt primarily with banks that we are familiar with, making sure that they're safe and sound too. Yes, we talked to Chris, we talked to our Brian Greathouse who works, I see his truck here every day at seven, he beats me to work, Johnny. So they're just looking at all sorts of different avenues that we can invest in. It's still nothing there that gets our excitement level up with the term and the commitment out there. So it's back to the short-term pain, making sure, or short-term gain that we don't have the pain that comes along with it. It's very challenging, but we look at it, as Johnny mentioned, every single day.

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

You answered your own question. They're in a budget space. They're in a budget space. They got the same situation we got, you know, so – You know, the key is, do you have overlap? Is it accretive, accretive, accretive? And do you have overlap? And are you like-minded? And will the cultures fit? And those kind of things are extremely important to both a seller and a buyer when they partner. And we're looking forward to hopefully bringing one home that you'll see that fits AAA, like-minded, overlap. Lots of savings, so I think hopefully we'll get one brought home before long. I'd be disappointed if we don't get this one. In other words, you just kind of throw your hat in the ring, but this one really we've worked on pretty hard, and I think it makes lots of sense for us. We have not signed the LOI yet, but I signed it and sent it out, so we're waiting on it to come back. Hopefully that transaction could be, if it continues to go forward, announced here in 30 days or so.

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

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

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

Yeah.

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

Yeah, it certainly could. If we're going to spend these trillions and trillions of dollars, I mean, the world's awash in money, right? And I guess what happens in the world's awash in money? That's usually when rates go up. So you've got to believe – At least if history repeats itself, which it normally does, you know, up nine-tenths in June and five or six in May, this inflation, I don't know where Powell's looking, but I know he's trying. But this 10-year at 130-something, I think it's artificial. I don't believe that's real. I think that's just the results of us just buying all the 10-years we can buy. Okay. That, to me, has to change at some point. I mean, even Moody's, which I don't know if they got all answers or not, but they're calling for a 1.90 by the end of the year. So it could bode well for bank stocks going forward, and people who have projects out there may want to get out and get them done sooner rather than later.

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

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

Yeah. I said 38% efficiency ratio. He's talking about the bank.

You know, we have a little thing called a holding company here. We add to this deal. He gets lost sometimes. He says, we'll get rid of this damn holding company. We'll make a lot of money. There you go. What was your question?

Can we reduce expenses?

Well, a little bit. Probably. We have, you know, we, as I said, getting ready for over $10 billion took us longer and cost more money than we ever anticipated. And we threw millions and millions of dollars at it. So I have to think at some point in time we'll go back and look at that. Now, I think you can pretty much, if the regulators allow, give us approval, which I think they will with our capital ratios, to move up $150 million, $175 million. I think you can see the cost of that trust preferred going away. So that's about $17 million in sub-debt. I mean, excuse me, sub-debt going away. About $17 million pre-tax. So we're looking at that. And Donna's group has not gone back in some time and looked at branching. And she has just pulled up all the branches at a certain level or below. And we're comparing that to back where they were prior to all of this free money flowing. And we're probably going to look at, there might be an opportunity on five, six, seven, maybe eight or nine branches, though. And we're looking at that. So we're back looking at those expense deals at this point in time. So we're on it. And we usually are able to scrounge up a little bit of savings.

Yep. Great. Okay. Thanks, guys, for the call. I really appreciate it. Thank you.

And our next question comes from Will Curtis at Hobby Group. Please go ahead.

Hey, good afternoon, everyone. Hey, Will. Tracy, I was going to wear my Razorback shirt to make good on the bet, but you never sent it.

You never sent it?

No, we even did a double or nothing. Maybe next quarter.

If I remember, you were supposed to go buy your own shirt, pay for it, and wear it.

I didn't know I was supposed to pay for it. Yeah, I was going to say, all right, well, send me the link into the store. I think most of my... Yeah, most of my questions have been addressed. So just a couple quick ones, and then following up on Stephen's question about the expenses. So if I understand, you know, as we think about maybe the next quarter or, you know, the next two quarters, is there anything that we need to consider in the expense base or some of those things, John, you were talking about, probably more intermediate-type discussions?

Well, the big part, the $300 million in sub-debt matures in – April. So it won't come until then. We have to give notice prior to that on the subordinate debt. I think we'll just kind of hopefully get that paid for. And the trust preferreds, we'll just kind of take those as they come down the road. So I think you can kind of count on that. I don't think the regulators would oppose us doing that. But if they do, we won't do it. But at least we're going to have half of it. We'd take half of it out.

Okay. And then... Last one, Brian. I think you said there's 18.2 million of remaining fees. What's your best guess on when you think those will be realized? Wow. That's a tough one there.

I mean, we've tried to put it in our re-forecast models every quarter, and unfortunately it's not been very close, you know. It's 18.2 million of it. I mean, theoretically it could spread out over the next four years. I would probably just say there would be – couple million next quarter and then probably just going to trail off after that. You got any better feel, Kevin? Because it's all related to getting the money back from the... Yeah, we're... I mean... That's what's causing that.

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

I understood.

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

Understood.

Thank you.

Our next question today comes from John Armstrong with RBC Capital Markets. Please go ahead.

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

Well, how do I feel about that? I would hate to see us fall off of that. We've always run, in ROTCE, we've always run 17, 18, north of 20 on those ROTCE's return on tangible. So it's not anything unusual for us. And over the last, you've probably heard the first report, you look at the stability of the earnings over years we've always led in that group. In our peer group, 10 to 50 billion, we're always in the top two or three of the ROTCs in the group. So I wouldn't anticipate, you know, we're going to try to defend the NIM. Hopefully we can. If we're right, if we call it right and rates start moving, I think you'll see a change and this silly race to the bottom will go away pretty quick. So... We can play the game, believe me. We got the muscle to play the game. I'm not saying we're bulletproof, but you heard the capital ratios, and you see how much cash this company throws off, as Alex says, into the shoebox. So, you know, it is a pretty powerful earning machine that has great asset quality that's sitting in the catbird's seat if we can just find the right place to deploy the assets, the cash. So, I think they'll come. I just have to believe it. We have some really big credits that we worked on for a long time that, because of situations, have not come to the top. But they're actually going to the board to get approval to do some of these because they're big credits for us. And they just haven't hit yet, but they're hitting. They're coming. As I said, we did, I think, $100 million or a little over yesterday. Okay. And those will fund pretty quick. So I'm optimistic that we have not given away the ship, and we're not going to give away the ship. If we have to, to defend ourselves, we can do that. But I'm pretty optimistic about the RLTCE, and I'm pretty optimistic about the NEM. I mean, if you add the excess liquidity back, it really takes you to about a $4.28. 424. 424 NIMS. So through all this chaos and all this crisis, Holmes held really in very, very strong.

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

Well, the answer is no. The disc one, let me tell you something. A 10-10 call every day, and Brian says we got $2 billion, and the next day he says we got 2.1, and then weeks later he says we got 2.4. You know, the disc one is difficult. I do the same thing with my money that I do with the company's money. So I don't treat it any differently. I feel like this is ours. I feel like we do own it. I feel like we run it like owners. We don't run it like employees. We run it like owners. And we are doing what we think is totally in the best interest of this corporation. Because we stepped down in the threes and the twos. And I was talking to a guy a while back. He said, well, I'm doing three and a quarter fits for ten. He said, you ever done any of that? I said, do you have any idea how many loans we can load an 18-wheeler or a warehouse full of loans at that kind of rate? But I said, you're selling your future, and you're here trying to sell your bank to me, and I know what you got. So I said, you got to pay the piper sometime, right? You don't have a free lunch every day when you give that stuff away. So we're holding tight. I think we're doing the right thing, and time will tell. If we miss it, hell, we can go and play the game with them if we have to, so.

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

I can pass the buck to Stephen Tipton on that. He gets blamed for everything. So what we try to do on that is, you know, we measure out and try to, you know, some markets have more loans than deposits, and some markets have more deposits than loans. So you try to give a transfer pricing figure to be fair. And of course, depending on what wagon you're on, it tends to hurt those if they have more loans or deposits. So it's more of an internal. They get it. They understand it. We have a little fun with it. And all in all, it still comes back to Centennial Bank and home bank shares number. So When I mentioned the eight that have done above, I promise you if the loan demand and all of those things and excess deposits, some of these guys have got plenty of excess deposits, and we're probably charging them a little more than what they would really be getting out there. Okay. Does that answer your question?

Yep, that helps. And for the record –

They fussed about it when rates were 7%, when rates were 6%, when they're 5, 4, 3, 2, 1. It just gives them something to argue with. You're charging me too much, Tracy.

Some of those carrying the excess deposits and loans are very critical to this company. It only matters to them because they're competitive with each other.

They want to be the best, and even the worst of our group, in any particular month would be, you know, at the top of most banks. That's right. That's the only reason it matters.

Okay. I think Eck is still listening, but we're both a little offended by all the hairline talk.

If I could get Tom to just send me a picture of him, why don't you just put it in my office and make me feel better.

And our next question today comes from Brian Martin at Janie Montgomery. Please go ahead.

Hey, guys. Good afternoon. A couple last ones for me. Brian, on that split on the PPP, most of that's round, I guess, round two or three. Harvey, the most recent round, is that kind of what's left in that bucket today?

Yeah, there's a hundred and this is as of June 30th. We had 144 million left in round one. And it looks like we had probably $347 million in round two.

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

That's right. So what's left of round one is not the lion's share of it. It's more round two.

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

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

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

It's all going to be up to our customers being willing to send in their forgiveness. And what we're finding, at least with the funding part in the last phase, the they weren't as attentive in the second phase as they were the first two because they were busy. These folks have businesses and they're operating again. And so they, when we were talking about funding around three, it was harder to get all their stuff in and get it done than it was the first two rounds when they were sitting at home. And it may be this forgiveness may, you know, may fall prey to the same thing.

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

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

Okay.

I mean, you look back over the last year and a half, two years through all this stuff, we've held – We've held fairly strong in there, I thought, on our margin.

Yeah, you mentioned the 420 number. I mean, we used to target 4% on a core basis. So, I mean, I think over time that's trended up.

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

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

I'll do the service charge one. A lion's share of that is related to CFG. I think we're up about $2,048,000 for that particular line item you're referring to. $1.4 million of that is related to our New York operation. The rest of it, I think, is related to some increased interchange fees that we had for the quarter. Mortgage.

Let somebody else take mortgage. Mortgage is having a good year. They're down a little bit from the frenzy of the end of last year and the beginning of this year, I think they still feel like it will be a very strong 21, but there's just not a lot of product out there. That's the difficulty. The difficulty is how the products are leveled.

You heard Sean from there. Our commercial lines there are just not very strong. He's writing lots of business, but again, we're getting lots of payoffs. People are They're actually going out and refinancing their housing at low rate and paying off their 5% boat loan. That's what they've been doing. So John reported that. He's continuing to see that. Any comment, John, on that?

No, sir. Right now, just exactly as you said, our production, we're pushing out $60 million a quarter, but our prepays are about $55, $56 million a quarter. The commercial side of our business, johnny i really think is going to slingshot back uh in second quarter of 2022 and and again what that looks like that's a tailwind of about 100 million 120 million dollars so i'm optimistic that uh that we will sustain net growth but it's going to take inventory uh once it starts going back i was visiting with an arkansas boat dealer and i said that was business he said i had the best year last year i've ever had

And he said, I'm having one of the worst years this year because I have no inventory. You know, he said, I don't want anything to sell. We sold out. So that's what happens. Yep. Chicken one day and feathers the next.

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

Well, this was a little bigger. When we're looking at it, it's a little bigger.

Okay. And then just the comments, maybe I misunderstood you on just the last thing. It was on the sub-debt and the trust preferred. Just the timing of when those could occur. I think you guys gave the color on the benefit, but the timing. One of them was April. April.

April is the sub-debt or the trust preferred? April is the sub-debt. And the trust preferred, we have to give... Notice on that, we can do that anytime. That's not as significant as the sub-debt. The sub-debt is much more significant. Yeah, that can't be. When I talked to Brian, ran the numbers on the sub-debt, we got $71 million, and I think he was going to keep – you going to pay off $41 or keep $41? Do you remember? We were going to pay off $47. We're going to pay off $47 and keep the balance. I mean, the problem – it's a good problem to have.

Some of our sub-debt is at extremely low rates, so – You know, when I'm sitting here looking at it today with all the excess cash, because I don't have, you know, all this excess cash isn't at the holding company, but, you know, right now there's some of that sub-debt doesn't even make any sense to pay off because it's at such low rates. So we pay off the $300 million of sub-debt. My preference would be to pay off $300 million of sub-debt first. Even though we could pay off the trust for first today, you just don't get much bang for your buck for paying off that little bit of sub-debt right now that's at that low rate. So I would focus on trying to get $300 million or as much of it paid off as possible when April 2022 comes down. As Mr. Allison said a couple times, we'll have $150 million for sure in available cash and whatever else the regulators let us take out of the banks, but we'll do the foul sub-debt.

You remember we've been putting back $5 million a month for some time. We didn't start it day one, but we decided to kind of have a mental slinking fund and start to retire that debt. That'll You know, it would be nice at some point in time, as well as the company's doing, to be debt-free. But if we need to go back in the sub-debt market, we can always go back. And the rates are down. We're probably going to get some sub-debt done today at 3%. So maybe you might get a two-handle.

Yep, gotcha. Okay, cool. Thanks. Take the questions, guys. Thank you.

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

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

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