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Home BancShares, Inc. (NASDAQ:HOMB)

Q2 2008 Earnings Call Transcript

July 17, 2008 2:00 pm ET

Executives

John Allison -- Chairman and CEO

Ron Strother -- President and COO

Randy Mayor -- CFO and Treasurer

Brian Davis -- Director of Financial Reporting & IR Officer

Analysts

Jon Arfstrom – RBC Capital Markets

Bryan Martin [ph] – Hal Barnes

Matt Oney -- Stephens Inc

Bob Whitehouse [ph]

David Scharf -- FTN Midwest Securities

Joe Stephan -- Stephan Capital

John Thompson [ph]

Operator

Greetings ladies and gentlemen and welcome to the Home BancShares Incorporated second quarter 2008 earnings call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company participants will begin with prepared remarks and then entertain questions.

(Operator instructions)

The company participants in this call are John Allison, Chief Executive Officer; Ron Strother, Chief Operating Officer; Randy Mayor, Chief Financial Officer; Brian Davis, Investor Relations Officer. The company has asked me to remind everyone to refer to their cautionary notes regarding forward-looking statements. You will find this note on page three of their Form 10-K filed with the SEC in March, 2008.

At this time, all participants are in a listen-only mode and this conference is being recorded. (Operator instructions) It is now my pleasure to turn the call over to our first participant, Mr. Allison.

John Allison

Thank you. Greetings, ladies and gentlemen and good afternoon. Welcome to our second quarter conference call. Last quarter, I talked about some of the most stressful financial times in many decades. Well, foreclosures continue at record levels, oil last time we talked was about $110 a barrel and now it’s over $140 a barrel, with gasoline hitting $4 a gallon. Even though the price of oil has moved up strongly, the price of natural gas which is a plus for the Fayetteville Shale play where we sit has also moved up. We’ve seen a continuation of the dysfunctional credit market and the demise now of IndyMac. Thanks for the low capital ratio, we continue to raise new capital. I thought the financial system had survived the wreck and has moved from intensive care to stable. But I now believe we may have moved back to intensive care.

I’ve said in the first quarter report, we need to keep our defense on the field by being proactive on asset quality, building reserves when appropriate and protecting our strong capital base. What was the best core operation in the company’s history was marred by a one-time charge of $2,067,000 or $0.07 a share resulting from a wrap down of an investment held by the holding companies.

We purchased an investment pool of subordinated debentures in various other bank holding companies. When we purchased these investments, the risk profile was more of a prepayment risk in long-term liquidity rather than a default risk. Default risk was viewed as minimal based on historical stats. Now that a few bank companies are experiencing problems, the default risk is rising. While no other bank – while no banks have defaulted, a few have begun to defer. These deferrals obviously changed the risk profile and the dysfunctional credit market with a lack of liquidity. That was our reason for writing down these securities. We believe this dysfunctional market will eventually recover and these securities may recover in part or in whole. But the conservative nature of this management team decided to wrap them down from $5.9 million to $3.9 million and place the balance on non-accrual.

From a core operation, the second quarter was the best in the company’s history, setting several records. We had record loan growth, record net interest income, and record efficiency core. The core ratio – core efficiency ratio was a record and broke 60 for the first time in the company’s history. We had expanded net interest margin and reduction in non-interest expense; couple that with the organization portion of the Metavante study that has just been completed is now ready for the implementation phase. Because of one-time gains and expenses in the first quarter and in the one-time write-off in the second quarter, I think the numbers will be far more meaningful on a core basis without all the noise in the two quarters. We will be comparing apples to apples.

After I complete my remarks, we will move to Ron for an update on loans and over to Randy to see what magic he keeps riding on the margin side. Let’s go to the numbers.

Q2 of ‘07, the company are in $5.1 million net income core versus June 30, 2008 $6.9 million, an increase of $1.8 million or 36.5%. Diluted EPS was $0.29 a year ago – June a year ago versus $0.37 this quarter, a $0.08 increase or 27.6%. Cash earnings core was $7.2 million for the second quarter of this year versus $5.3 million for the second quarter of last year, an increase $1.9 million or 35%. I like those 30s. Cash diluted EPS was $0.39 a share versus $0.30 up 9%, another 30% increase.

On a linked quarter basis, it was also strong on core basis. Last -- first quarter of this year, we are in $6.3 million. Second quarter of this year is $6.9 million, an increase of $565,000; 35.8%. During the first quarter, we are in $0.34 on a core basis and $0.37 on the second quarter on a core basis, up $0.03; another 35.5%.

Cash earnings core for the second quarter were $7.2 million versus $6.6 million for the first quarter, $565,000 increase or 34.3%. Cash diluted EPS core was $0.39 for the second quarter versus $0.35 in the first quarter at $0.04 a share, up 46%. That's a little bit skewed because we get a little rounding in about $0.02 a year, a penny in each every other quarter.

On operating highlights, quarter over quarter, net interest income was a record $21.7 million for Q2 of ‘08 versus $16.7 million Q2 of '07, up $5 million or 29.8%. Loan loss provision, second quarter of '07, we put in about $680,000 and Q2 of '08 $704,000; about $24,000 increase in loan loss provision.

Non-interest income core was $7.7 million for the second quarter of this year versus $6.6 million for the second quarter of last year, an increase of $1.2 million or 17.5%.

Non-interest expense increased $3 million from $15.5 last year to $18.5 this year, an increase of 19.3% primarily as a result of the acquisition of Centennial. Net interest margin continues to improve year over year from 3.51% last year to 3.89% this year. That's up 38 basis points.

Let's go to linked quarter basis. Net interest income, as I said, was a record $21.7 million versus first quarter at $20.8 million, up $910,000 or 17.6%. Loan loss provision was $704,000 for the quarter just ended versus $4.8 million in the first quarter as we built reserves in the first quarter. Non-interest income core was a record $7.7 million in the second quarter of '08 versus $7.7 million in the first quarter of '08, only slightly up by $23,000.

Another bright spot for the organization is non-interest expense. Non-interest expense in the first quarter was $18.7 million. Non-interest expense for the second quarter of '08 was $18.5 million. It was down $186,000 or 4%. We continue to work on the expense ratio and hopefully we'll continue to see improvements there. Net interest margin likewise improved from the first quarter at 3.78% to the second quarter at 3.89%, up 11 basis points.

Quarter over quarter, ROA core last year was 0.92, this year at 1.08 ROA. Cash core, 0.99 June of last year to 1.15 second quarter of this year, cash tangible ROE core moved from 11.14 last year to 12.57 this year, and efficiency ratio dropped from 62.95 last year to a record 59.66; that's 329 basis points reduction.

On a linked quarter basis, return on assets in the first quarter core was 1% and the second quarter 1.08; continued improvement there. Cash ROA core moved from the first quarter at 107 to 115 in the second quarter and cash tangible ROE core moved from 11.86 to 12.57, up 71 basis points. While the efficiency ratio dropped even though we were proud of our efficient ratio in the first quarter, dropping to 60.09 on a core basis, it dropped to 59.66, down another 43 basis points.

Loans increased year over year $426 million or 28% to a record $1.95 billion. Total assets increased $371 million to $2.61 billion up 16.6% and total deposits gained $258 million to a record $1.9 billion, up from $1.64 billion last year, 15.8%.

Our stockholders' equity grew just short of $50 million, an increase of 20.8% to $287.9 million. On a linked quarter basis, we grew loans in the second quarter over the first quarter by $84.3 million which was the best organic growth in the company's history. Loans have been a major driver for this company.

Total assets increased by $40.5 million to $2.61 billion and total deposits were up for the quarter $47.1 million to $1.90 billion. If you remember in the first quarter, we grew about $80 million in deposits and we've come back with just short of $50 million here. So we're seeing a little deposit growth. And stockholders' equity grew to $287.9 million.

We funded the $84.3 million in loan growth in the quarter with $47 million in deposit growth and about $30 million in securities rollup.

Asset quality, I'll talk about that, allowanced loan losses for June 30 of last year, we had a 1.84% in reserve for loan losses. As of June 30 of this year, we had 1.87%. The coverage ratio allowanced to non-performing loans last year was 147 and this year was 299%.

Non-performing loans to loans June 30 of '07 was 1.25, dropped to 0.63 for the second quarter of this year, down 62 basis points. Non-performing assets to assets likewise dropped from last year at 0.86 to this year at 0.82, down 4 basis points.

Loans past due 30 days or more including past due non-accrual loans and total loans dropped from last year at 1.44 to this year at 0.84, down 60 basis points showing marked improvement. Allowanced loan loss on a linked quarter basis, we dropped from -- the first quarter we had 1.99% reserve to 1.87% as we continue to clean up Florida and Ron will talk more about our charge offs in a minute.

Allowanced non-performing loans dropped from 308% in the first quarter to 299% in the second quarter. Non-performing loans to loans in the first quarter were 0.64 dropped to 0.63 in the second quarter, and non-performing assets to assets increased 15 basis points from 0.67 to 0.82 that's primarily as a -- totally as the result of the trust preferred if we put on non-accrual that we discussed early in my opening remarks.

Loans past due 30 days or more including past due non-accrual loans to total loans went up from 0.83 in the first quarter to 0.84 in the second quarter. On the branch expansion, we didn't open any new branches in the second quarter. This year, we've opened Morrilton as we disclosed earlier and Cabot, Arkansas.

At this point, this concludes my opening remarks and I'll turn it over to Ron Strother for a discussion on loans. Ron?

Ron Strother

Thank you, John. As Johnny indicated, it's just been a record quarter on credit. Our pipeline continues to be strong. We had $84 million increase which Johnny talked about. It's coming principally from Central Arkansas. Great opportunity. The bank here in Conway produced about $19 million in the quarter, Cabot $24 million, Twin City in Little Rock $17 million, and Centennial about $21 million.

Talk about the mix for a second. Total real estate continues to subside. We began the quarter about 83% in real estate; we are down to 82.2%. Construction and land development also saw a decrease. It went from about 18.3 to 18.1. This is the seasonal time for agri. We saw it move from 0.9 to 1.7 with the funding of the crops. C&I continues to grow as Johnny indicated with the Fayetteville Shale lending. We're seeing lots of opportunities in that arena.

We touched on asset quality. Johnny has talked about a lot of it. Let me drill down just a little bit further. The NPAs increased about 4.3 million for the quarter. However, 3.9 million of that was specifically in the investment non-accrual and Florida has about 50% of our NPAs.

Johnny asked me to talk about the charge-offs. We had $2.5 million in charge-offs for the quarter. We had $1.3 million in recoveries for net charge-offs of $1.2 million. Of that $2.5 million, $1.7 million was in Florida and the balance was in Arkansas. As we indicated last month, 500 -- or last quarter -- $575,000 of those charge-offs are part of the earn-out agreement with Centennial.

A lot of attention is being paid today on construction and land development and more particularly non-performing loans in the C&D category. I am pleased to report, of the $12.2 million that we have in NPLs, only $3.8 million was in C&D. To put that in further perspective, we have $353 million in total C&D loans, and of that $3.8 million or 1.03% was non-performing as of the end of the quarter.

John, that concludes my remarks.

John Allison

Thank you, Ron. Good report. Randy, you seem to be the margin guru of this. We'll give you all the credit for the increased margin and tell us what's going on.

Randy Mayor

Well, as Johnny mentioned, our net interest margin did improve 11 basis points on a linked quarter basis. The yield on our interest earning assets declined 42 basis points from 686 to 644. With the majority of the decline attributable to loans, loan yield declined 53 basis points from 731 to 678. However, we were able to offset the 42 basis point decline on the asset yield with a 56 basis point improvement in interest bearing liability yield, which dropped from 350 to 294. Deposit yields improved 59 basis points from 3.47 to 2.88. We also saw a 65 basis point improvement on approximately 110 million in repurchase accounts, a 34 basis point improvement on approximately $250 million in borrowings and a 64 basis improvement on $47 million in troughs. As for what the future holds, we were slightly negatively gapped at this time at about $39 million in the 12 month window. We basically have $1.2 billion in loans and $1.2 billion in deposits repricing in the next 12 months. $840 million of the repricing deposits are in time deposits and approximately $359 million are in non-time deposits that at or nearing the floor, and will cause us a little bit of pressure on the margin there.

With that, I'll turn it back over to you, John.

John Allison

Thanks Randy. Some time, market excesses can be good. For those of us with gray in our hair, market correction is painful to watch as the previous ones have been, but having benefitted from those past experiences, your management team has attempted to position Home BancShares to take advantage of the market turn down and not be a victim of it. Excess capital, strong loan loss reserves and sticking to the basics in lending culture, we believe that we've set our sales apart from the herd. We see great opportunity in building a solid engine for the future. Arkansas continues to be blessed with positive news. The Fayetteville Shale revenues are growing by the day and Hewlett-Packard has just announced a new facility in Conway with the creation of 1200 jobs that average in salary from $48,000 to $60,000 each. With the help of Metavante, HBS is beginning the implementation of several hundred improvement ideas that will make us a better bank. The process improvement forum will have trimmed the efficiency ratio while also positioning the product delivery platform to do what they are paid to do, and that's push product. While it's still early, we're told this should save us several million dollars annual and that’s without charter consolidation and management has decided to pursue further consolidation over the next year. As the industry continues to struggle to raise capital, the old efficient loan loss reserves at the expense of earnings, Home Bancshares is pleased to be in the position it's in. Sometimes market excesses and market corrections are not all bad.

Operator, we're ready to go Q&A at this point in time.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Jon Arfstrom of RBC Capital Markets.

Jon Arfstrom -- RBC Capital Markets

Good afternoon guys.

John Allison

Hey Jon, how are you?

Jon Arfstrom -- RBC Capital Markets

Good, doing well. A few questions here. Can you talk a little bit more about the charter consolidation and how that might lay out in terms of timing and any name changes that go along with that or is that just merely back office?

John Allison

Well, that is yet to be determined. Jon, only if there is a name change but the schedule for consolidation is that – we could be completed providing things go are way – we could be completed but – should be completed by the third quarter of 2009. What do you want to know more specifically on it, Jon?

Jon Arfstrom -- RBC Capital Markets

Well -- cross benefit analysis and how you think about that.

John Allison

You want us to tell you how much money we are going to save so you can forecast.

Jon Arfstrom -- RBC Capital Markets

It’s going to be great.

John Allison

It'd be great. I'll let Randy Mayor read it with you.

Randy Mayor

Jon, I think Johnny has mentioned several times the victory of the Metavante initiative that we've been in and it is expected to bring us quite a bit of savings but we really can't give a whole lot of guidance on that and we've been looking at that without a charter consolidation piece, so that's going to be an addition to that but it's something that were kind of working our way through and as we first (inaudible) met here you probably actually see a little bit of increase in expenses as we start the implementation process. We really don't expect the full brunt of the study and the charters to hit us probably until the last part of 2009, so it's really kind of hard to quantify at this point but we are expecting some good numbers out of that.

Jon Arfstrom -- RBC Capital Markets

Great.

John Allison

Jon, I appreciate you asked question because I have been asking them the same question and I get the same answer you just got.

Jon Arfstrom -- RBC Capital Markets

All right, good. A couple of questions on (inaudible). You said that, if I – - I was ready for the quick rebut, did you say that Centennial had 21 million in loan growth for the quarter?

John Allison

Yes, they had just a really, really strong pipeline. The volume is counted from a number of different areas. It’s known more of a private bank, bit of a boutique bank and their customer base has really favored them. There has been some difficulty in this market lately that has opened the door with some competitors and they have done today in Twin City both have done a very effective job of moving in on those customers.

Jon Arfstrom -- RBC Capital Markets

Okay. Well, I just thought based on their asset base that seems like very strong growth for the quarter.

John Allison

That was strong, they were $0.02 a credit to the corporation for the quarter, Jon. So they were half a cent in the first quarter and $0.02 in the second quarter; so that acquisition is working out great.

Randy Mayor

Yes, they made $1.3 million for the year so far.

Jon Arfstrom -- RBC Capital Markets

Good. Any update in the MPAs that they have? Does has compared and [ph] curved out?

John Allison

I am very happy to tell you that the 2.1 paid off -- 1.9 paid off and – of the – I don't what was is 8 million or so. I think they are down to a fraction of that, may be a couple of million. So on the 6-month period they have done a phenomenal job on moving those assets out.

Jon Arfstrom -- RBC Capital Markets

If I have a lot time [ph], we will talk about that. (inaudible) Okay, and just may be a bigger picture question, Johnny talked about market disruption and can you fill us in a little bit on what is happening in your various Arkansas market and then how you feel about growth in the keys [ph].

John Allison

Jon, there has been some market disruption in Arkansas, primarily with the lenders who loaned in Northwest Arkansas. A lot of that is coming to the top and people have to deal with those problems in Northwest Arkansas. As you remember, we acceded that back in January and we have less than that – like $20 million worth of total loans in that market. Still a great market but it is going to take a while to work through that.

As a result of that and as a result of the A and B crisis that happened in Arkansas, we have seen some opportunities and some of the financial institutions in Arkansas have come under pressure from the regulators and when that happens, that's both good and bad. When there is something bad for someone, could be something good for us. So, we have been the beneficiary of some opportunities here recently and it appears that we are going to continue to be the beneficiary of some opportunities in the future.

Jon Arfstrom -- RBC Capital Markets

Okay. How about in the (inaudible).

John Allison

As far as growth John, we are primarily looking at Arkansas. In Florida were wrestling through that and the NASDAQ quality sat in charge them as we get them. We think we are getting our arms around the Florida assets and we are taking them and beat them. We have exceeded the charge offs and we will deal with them appropriately as we always have.

Jon Arfstrom -- RBC Capital Markets

Okay. Thanks a lot guys, it is a nice job.

John Allison

Thank you.

Randy Mayor

Thank you, Jon.

Operator

Our next question comes from Bryan Martin [ph] of Hal Barnes.

Bryan Martin -- Hal Barnes

Hey guys.

John Allison

Hi, Bryan,

Bryan Martin -- Hal Barnes

May be just one question for Randy on the loan side with the loan growth of this quarter -- were there any larger loans in there – that is kind of driving that growth? Or was it- – or was it just broken up by bank or was there — any larger ones that just kind of took it over the edge that made the record quarter.

Randy Mayor

No 8-figure credits. It is just solid singles, 4 million – 5 million, we get by some participations from the energy company here in Arkansas. That was a nice deal and – but it is hotel/motel. The agri, we have good funding on that credit but nothing large. The pipeline continues to look really good.

Bryan Martin -- Hal Barnes

Okay, similar to half [ph] the credits, nothing large in the pipeline that would --

Randy Mayor

No.

John Allison

Bryan, we are feeling the benefits of the pay-offs with Shell [ph]. We’re seeing lots of smaller contractors that need some assistance in carrying their receivables. That is coming pretty strong.

Bryan Martin -- Hal Barnes

Okay.

Randy Mayor

Bryan, that is why the C&I is growing.

John Allison

Yes.

Randy Mayor

We have been predominantly a real estate bank and these contractors, as Johnny said, these vendors that’s given us great C&I opportunities.

Bryan Martin -- Hal Barnes

Okay, great. Just looking at the funding of the loan growth this quarter -- a part of it the drive down on the securities portfolio versus deposits, what’s the 5.4, I mean is there more to pull out of that securities portfolio or is it more of mortgage funded with the deposits at this point?

Randy Mayor

Yes. We’ve got about another 90 million to roll out the securities portfolio between now and the end of the year. But deposit growth has been – it has really been benign over the past several years. But it appears to be strengthening somewhat. I don’t know if that’s a flat to [ph] quality with everything that’s going on because we’re known for our excess capital and strength. So I’m not sure where that’s coming from, but if that’s where it’s coming from, that’s strong. And we’re not running any deposit bonuses or high CD rates. We’re not playing any of those games. And with the demise of IndyMac and Countrywide going into Banc of America, we might see a lot of pressure coming off of those rates because broker deposits will run up by then. As you know, we don’t have the $47 million or $48million worth of broker deposits, so we’re pretty well core funded.

Bryan Martin -- Hal Barnes

Okay. Just maybe a question for Randy on the margin, it sounds like pretty neutral and I know its slightly negative gaps, but the CDs that you’re putting on now, what type of rate? Is there any real benefit on those CDs as you reprice them now or is it kind of a neutral? I mean that the average cost in the quarter was at about 375, I thought?

Randy Mayor

Yes, there is still some benefit coming off of those as far as the repricing goes, but that is starting to dwindle, you’re right there that some of that pick up will be going away and that’s where we’ve been getting a lot of the kick, along with some of our borrowing, repricing also.

Bryan Martin -- Hal Barnes

Okay and just remind me, the percentage of the loan book that floats with prime.

Randy Mayor

Floating is about -- it’s changing a little bit. It’s about 46% float now.

Bryan Martin -- Hal Barnes

Okay. Does that mean if rates were to go up, you see that as a benefit here if the Fed were to take rates higher?

Randy Mayor

Yes. We would probably prefer to stay flat or go higher because of the -- really it’s more on the liability side that there’s not a lot of rooms to keep repricing what I’ll call our non-CD deposits.

Bryan Martin -- Hal Barnes

Okay. You by any chance have the margin by month, where it ended June? Just trying to get an idea of what the trend was in the margin.

Randy Mayor

The trend was strong in April and May and squeezed in June.

Bryan Martin -- Hal Barnes

Okay.

Randy Mayor

So, we had the troughs, the reversal of troughs accrued interest in June which made an impact on it and I’m not sure -- I don’t have the exact impact on it. But it got my attention when I saw that margin in the month of June, and soon after I memoed, everybody paid lots of attention to what we’re doing so –

Bryan Martin -- Hal Barnes

Does that mean even if you had the number, it might not be a core number with that adjustment in there?

Randy Mayor

Yes, here Bryan’s got the number. Here you go.

Brian Davis

Hey Bryan, this is Brian.

Bryan Martin -- Hal Barnes

Hey.

Brian Davis

For April, it was 395. And for May it was 392. In June, it did drop to 378 but that’s when we put the trough investment on non-accrual status.

Bryan Martin -- Hal Barnes

Okay.

Brian Davis

And so we had to reverse all of the accrued interest that we had on that.

Bryan Martin -- Hal Barnes

Okay.

Brian Davis

And that was probably if you normalized all the quarters or months, that was probably about $200,000.

Bryan Martin -- Hal Barnes

$200,000, okay. All right, perfect. That’s all I had. Nice quarter, you guys.

Brian Davis

Thank you.

Operator

Our next question comes from Matt Oney [ph] of Stephens Inc.

Matt Oney -- Stephens Inc.

Hey, good morning gentlemen. Great quarter.

John Allison

Thanks, Matt.

Matt Oney -- Stephens Inc.

My question deals with the loan loss provision. It is this kind of the first meaningful drop we’ve seen in the reserve ratio in quite some time and I think the reserve ratio is now close to 4Q levels pre-Centennial. What are your thoughts on this reserve ratio going forward in terms of how you view it internally?

John Allison

It’s not the first time that the loan loss provision has dropped. We’ve vacillated in and out on that loan loss provision for a while but that’s why we built reserves because we anticipated the problems in this cycle as we clean up Florida, we’ll continue to charge in Florida -- when we have a problem in credit down later. We’ve identified everything we know in that market and as we get it back, we charge it and deal with it, so I think probably you’ll see the loan loss provisions, probably continue to come down over the next year.

Matt Oney -- Stephens Inc.

The provision or the reserve ratio?

John Allison

Reserve ratio. Excuse me, the reserve ratio. We basically were flat for we had about – we put about $700,000 in reserve at the end of the quarter and a $1.3 million recovery for about $2 million. We charged off $2.5 million and $500,000 of that is on someone else’s ticket, that’s on Centennial’s ticket, not our ticket. So we’re basically flat for the quarter but we had tremendous loan growth rolled in -- I don’t really expect that $84 million quarter loan growth to run at that rate. That is just phenomenal loan growth for our company.

Matt Oney -- Stephens Inc.

So is it fair to assume with the reserve ratio dropping, that delinquent loans in terms of the dollar amounts also have been decreasing recently? Is there a dollar amount change in delinquent loans you can drive for us?

John Allison

Well, I read that in my prior statement. Let me go back to that. On past dues, at year ago period, it was 0.86 and that included loans that were past due 30 days or more including past due non-accrual to total loans. Excuse me, that was 1.44 June 30 of ’07. And June 30 of ’08, it was 0.84. And on a linked quarter basis, loans past due 30 days or more including past due non-accrual loans to total loans was 0.83 and they went to 0.84. So that includes non-accrual and past dues. So they’ve been flat.

Matt Oney -- Stephens Inc.

Okay, very good. Also, I wanted to ask about the -- are there any more details that you can provide for us on the impaired security in terms of where are these banks located and how many banks are in this pool and maybe kind of the accounting rules regarding the impairment as to why a certain amount was put on -- were considered impaired and the rest were put on non-accrual?

John Allison

We had about $4 million in one pool and about $1.7 million in another pool. Pool one, we’ll refer to it, had four deferments in it from bank that deferred, no defaults but they had deferred and in each pool, there’s probably – how many banks, Randy?

Randy Mayor

There’s probably 45 to 55 banks in there.

John Allison

Yes. 45 to 55 in the pool. We had four that deferred. In pool two -- and we took a 50% charge down on that. We wrote that down 50% from $4 million to $2 million. Pool two was a $1.7 million pool and it had one deferment in it. As a matter of fact, the guy that deferred in pool two also deferred in pool one. That bank has since been sold, and that transaction will close probably in the third quarter or just after the third quarter. So we didn’t wrap that security down, we just non-performed it. But if we see it -- we expect that those will probably recover at some point in time, as I’ve said in either in whole -- in whole or in part, but they’re scattered. The banks are scattered throughout the country.

Randy Mayor

It is a different banks. Matt, we’re down to 3.9 total left in both pools, so you’re looking for a total (inaudible) probably that would be it.

Matt Oney -- Stephens Inc.

Okay.

John Allison

I started to write it -- you know how conservatively we are, Matt. I started to write the whole thing off but I thought that was way overkill. I think there’s a lot of banks that have these securities in their portfolio; they’re wrestling what to do and I don’t know if we started the dominoes falling or not. You know how we do things. If it’s got a problem, we’ll get rid of it.

Matt Oney -- Stephens Inc.

Yes. I understand that, and unfortunately default risk wasn’t a major consideration for anyone a few years ago, so I know that you understand both that many banks are. What about as far as expenses in 2Q? Anything there that is unusual or is that a pretty good run rate?

John Allison

That’s a pretty good run rate. We had a -- from the defalcation we had at Twin City, it was about $100,000 and we had about $200,000 of Metavante still in there for the quarter, but it looks like a pretty good run rate. We’re pretty pleased with that number.

Matt Oney -- Stephens Inc.

Okay, and last question. Could you remind us what your dollar exposure is in the Florida mainland?

John Allison

$20 million -- less than $20 million. Less than $20 million, of which one loan is a $12 million citrus park.

Matt Oney -- Stephens Inc.

And the rest are single family mortgages?

John Allison

We don’t have a -- to my knowledge, maybe speaking out of target, we have one -- I don’t know. We don’t have a single family mortgage (inaudible).

Matt Oney -- Stephens Inc.

Yes. It would be strip centers on Tamiami and stuff between Marco and Port Charlotte.

Randy Mayor

So we're over on the western side, Matt.

John Allison

And if you remember, Matt, we got there light, thank goodness though.

Matt Oney -- Stephens Inc.

That’s right. Very good. Okay, gentlemen. Thank you very much.

Randy Mayor

Thank you, Matt.

Operator

(Operator instructions) We have a question from Bob Whitehouse [ph].

Bob Whitehouse

Hey guys, just to give you a break from answering all the technical questions --

John Allison

Hi, Bob. How are you?

Bob Whitehouse

Good, Johnny. How are you doing?

John Allison

Great.

Bob Whitehouse

Just want to say thanks to the management team there. You're doing a great job and please share our appreciation to the employees at all levels of the organization. We are proud to have their leadership and talent.

John Allison

Well, thank you very much. That’s kind, very kind. Was that your comment?

Bob Whitehouse

That was my comment and question.

John Allison

Well, thank you very much Mr. Whitehouse. We kind of get cheated [ph] up from these conference calls from time to time. It's nice to have a nice comment like that. We look forward to seeing you again Bob.

Bob Whitehouse

Yes, sometime.

Operator

Our next question comes from Matt.

Matt Oney -- Stephens Inc.

Hey, one more follow-up guys. I saw the press release on the stock dividend. Can you give us your thoughts kind of the strategy as to why a stock dividend and how you chose that amount?

John Allison

That was a pretty long discussion around here Matt. At First Commercial Corporation for many years we did that. We do it about every three years. We do a stock dividend. We're primarily a retail stock. I understand that it didn’t change the -- one of my directors said it's still a ten-inch pizza and I understand that, but we're primarily a retail stock and retail people like that -- we did it at First Commercial and it was successful and with the excess capital we're sitting on right now, we thought we'd do an 8% stock dividend and increase our dividend, kind of reward for our shareholder to show our appreciation.

Matt Oney -- Stephens Inc

So we shouldn't expect another one for a few more years (inaudible).

John Allison

That's correct. That's not going to be an everyday event. Hopefully – we said we wanted to get our dividend at some point in time in the 30s of earnings and with this we'll be about 17.9% -- 18% is our pay-out ratio, so we'll continue to build dividends hopefully, over a period of time and when we get there we'll probably go back to once-a-year annual dividend increase.

Matt Oney -- Stephens Inc.

Okay. Thanks guys.

John Allison

Thank you.

Operator

Our next question comes from Mr. David Scharf of FTN Midwest Securities.

David Scharf -- FTN Midwest Securities

Good afternoon guys.

John Allison

Hey, David.

David Scharf -- FTN Midwest Securities

I just wanted to follow up. Most of my questions have been answered but I'm just curious looking at the loan to deposit ratios and (inaudible) 100%. We've been using the Securities portfolio to kind of bridge the gap but if that warrant [ph] itself out, what's going to be the strategy should the loan growth remain as strong as it has been to really draw some of those core deposits higher.

John Allison

Well, we still have lots of borrowing capacity if we choose to use that and we have refinanced a lot of our borrowing capacity recently but we have stayed out of the fray on the deposit game and we could step in there if we needed to. So we still have continued security roll off over the next 24 months basically and we'll hopefully continue to build deposits. We're seeing, as I said, basically loan demand was funded -- the first six months of this year was funded by deposit growth and we only have $49 million in broker deposits and we're not afraid to use that if the rates are right. So we have all the tools in the arsenal we think to be able to fund our loan growth.

David Scharf -- FTN Midwest Securities

And as it relates to the (inaudible) on the royalty checks and I know you'd mentioned before that you maybe getting into the trust game or the brokerage game. Is that still on the table?

John Allison

That is on table and our Twin City bank has started that. We actually started in Cabot and then Twin City (inaudible) has come in and hopefully we will be bringing that to Conway before too long because Conway is really the head of where we play in the (inaudible).

David Scharf -- FTN Midwest Securities

Now, are you guys are doing that internally or are you partnering up with someone such as one of the regional brokerages?

John Allison

Yes. We use the (inaudible) we moved up to a higher level with LPL and these are (inaudible). So it's internally generated.

David Scharf -- FTN Midwest Securities

Okay.

John Allison

(inaudible) It's internally generating.

David Scharf -- FTN Midwest Securities

Ok. And how do you feel the discussed rates then if you're going to get (inaudible) but just generally speaking?

John Allison

And I saw that report Tuesday of this week and was very pleased.

David Scharf -- FTN Midwest Securities

Okay.

John Allison

It's been in about (inaudible) really been in operation about a 120 days now and was very, very pleased. Someone asked me if we have and I said no, we don’t have that. Ron said the only reason you say that because it's not making a profit but she started to contribute and it looks like it's -- look like it was a good move.

Ron Strother

Just as inside Arkansas’ being blessed with the national meeting of the National Royalty Owners and it will be held in Little Rock in September with the Peabody and we're going to be the keynote sponsor of the National Royalty meeting. So we'll have people from all over the United States. So, with the (inaudible) it's quite focused right now.

David Scharf -- FTN Midwest Securities

Do you -- do you have any speculation you can give to when do you expect those sort of royalty checks to start to make it into the -- the banking systems from the deposit standpoint?

John Allison

It's there in all phases. They're from -- they're from just starting to build a pad to actual royalty checks starting to come in now and I guess there is more construction going on than there is royalty checks coming in, but as I told you before David, the first thing the little farmers' going to do is buy him a new pick-up truck then he's going to build mama a house, and he got to get his son a pick up and a new house. So -- but we're starting to see some of that money come in.

David Scharf -- FTN Midwest Securities

Okay. Very good. Thanks for your help.

John Allison

Thanks.

Operator

Our next question comes from Joe Stephan [ph] of Stephan Capital [ph].

Joe Stephan -- Stephan Capital

Hi Johnny.

John Allison

Hi Joe.

Joe Stephan -- Stephan Capital

Johnny, a couple of questions, those have been answered but we're hearing some bankers start to talk about that they're really able to start getting back the better pricing on both sides of the ledger, both on loans and deposit pricing. But a lot of it depends on competition. What can you -- just sort of give us your macrocomments. When you have commercial loans coming up for renewal, are you able to start moving right back up this? A little bit higher rates and the same thing on the deposit side. Thanks. (inaudible)

John Allison

We're seeing it only in the deposit side. We're not seeing as -- as much on the loan side and we have some banks in Arkansas that were the leaders of low rates [ph] and they're -- they're kind of -- they're kind of wounded. Some those banks are somewhat wounded right now. So I expect we're going to see as competition has lessened on the loan side in this market, I suspect we are going to see opportunities to raise those rates in the future. It has been very competitive, though, Joe, so thus far -- thus far has been very competitive but as the number of big players began to diminish, then we think we'll have an opportunity to move that process.

Joe Stephan -- Stephan Capital

Okay. Great quarter guys. Thanks.

John Allison

Thank you, Joe.

Ron Strother

Thanks, Joe.

Operator

Our next question comes from John Thompson [ph].

John Thompson

Hello, Johnny. Great quarter and congratulations.

John Allison

Thank you, John.

John Thompson

Hey, I'm traveling in New Jersey and I did not see the press release on the 8% stock dividend. Could you explain a little bit more please?

John Allison

We declared an 8% stock dividend along with an increase in cash dividend and another half percent of shares so we were paying $0.055 quarterly. We went to $0.06 and so your next dividend will have 8% more stock and then you'll have a $0.5 increase on your dividends. It's about a 63% increase in dividend -- cash dividend year over year.

John Thompson

Right. Thank you very much.

John Allison

That's it John. Thank you. You have a good trip.

John Thompson

Okay. Thank you.

Operator

(Operator instructions) At this time, it appears there are no further questions.

John Allison

Ron, I'll just wrap up here if you don't mind if there's no further questions?

Ron Strother

That's fine with me.

John Allison

Okay. I just want to thank you for attending our -- our conference call today. As I said, Arkansas' blessed with rye, soybean, wheat, and natural gas and this new HP contract coming with about 1,200 jobs in convoy. We're pretty excited about that. So hopefully, we'll continue to separate ourselves from the pack and we'll continue to work hard to do that and look forward investing with you in 90 days. Thank you very much.

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