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IBERIABANK Corporation (NASDAQ:IBKC)

Q3 2008 Earnings Call Transcript

October 22, 2008 9:00 am ET

Executives

John Davis – Senior EVP, Director of Financial Strategy, Mortgage, & Title Insurance Companies

Daryl Byrd – President and CEO

Anthony Restel – Senior EVP, CFO and Chief Credit Officer

Michael Brown – Senior EVP and Regional Market President

Analysts

Jennifer Demba – SunTrust

Bryce Rowe – Robert W. Baird

Dave Bishop – Stifel Nicolaus

Chris Marinac – FIG Partners

Matt Olney – Stephens Incorporated

Ross Haberman – Haberman Fund

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the IBERIABANK Corporation third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator instructions) I would now like to turn the conference over to our host, Mr. John Davis, Senior Executive Vice President. Please go ahead, sir.

John Davis

Good morning. Thanks for joining us today for this conference call. My name is John Davis, and joining me today is Daryl Byrd, our President and CEO; Michael Brown, President of our Markets; and Anthony Restel, our Chief Financial Officer and Chief Credit Officer.

I hope everyone has had an opportunity to obtain a copy of the company’s press release we issued yesterday evening. Given the significant level of financial data and trends, we have prepared a PowerPoint presentation that we may occasionally refer to during this morning’s discussion.

If you have not already obtained a copy of our press release, you may access this document from our website at www.iberiabank.com under Investor Relations and then Press Releases. The link to the PowerPoint presentation is also available on our website in the IR section under Investor Presentations. A replay of this call will be available until midnight on October 29 by dialing 1-800-475-6701 with the same confirmation code as this current call namely 959989.

Our discussion deals with both historical and forward-looking information, and as a result, I will recite our Safe Harbor disclaimer. To the extent that statements in this report relate to the plans, objectives, or future performance of IBERIABANK Corporation, these statements are deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations and the current economic environment. IBERIABANK Corporation’s actually strategies and results in future periods may differ materially from those currently expected due to various risks and uncertainties.

A discussion of factors affecting IBERIABANK Corporation’s business and prospects is contained in the company’s periodic filings with the SEC. And this morning in fairness to everyone listening to the call, we ask that you push the mute button on your telephone to limit any background noise that may occur during the conference call.

I will now turn it over to Daryl for some introductory comments. Daryl?

Daryl Byrd

John, thanks. And good morning everyone. Today I’m pleased to report very solid quarter for IBERIABANK Corporation. We reported GAAP earnings of $0.68, but when you consider the one-time charges of ANB acquisition of $0.09, our Prairieville office closure of $0.02, and hurricane related cost of $0.01, we consider adjusted EPS was around $0.80.

We also experienced a significant improvement in net interest margin for the third quarter. This move was consistent with communications and repricing schedule we provided in the last call. Most importantly, we view our credit quality as generally stable to improving.

Depending upon the metrics that you choose to focus, our historical earnings frame was not built on any of the types of lending that avail so many in our industry. Anthony will cover many of our credit metrics in a few minutes, but I’d like to note to you that the Arkansas builder portfolio topped 23% this quarter and is now down to $35 million. I’d also like to point out that we’ve completed our regulatory credit quality exams at both IBERIABANK and Pulaski Bank.

This quarter we completed our integration of the eight branches and deposits from the failed ANB. We completed all systems conversions and believe nearly all the one time expenses associated with this transaction had been incurred. We are delighted with the team we have in place in Northwest Arkansas and believe we can significantly leverage our infrastructure there and improve our relative market position over time.

Speaking of market position, we believe the teams that we now have in place in each of our markets are the strongest of any point in the development of the franchise, as evidenced by our solid loan growth we are taking class in each market. Frankly, coming off of the spring deposit campaign in the ANB acquisition, we’ve incurred some deposit run-off this quarter in certain markets. We’ve experienced the positive effects of flight to quality from a deposit perspective and we expect this dynamic to continue given the current economic circumstances.

We continue to believe that this franchise is extraordinarily well positioned given the issues concerning the industry. We intend to be strategic, but patient. As always, I appreciate the hard work of our associates. At this point, I’ll turn the conversation over to John. John?

John Davis

Thanks, Daryl. I will start with a brief summary of our financial results for the third quarter of 2008. And for those of you who may have an interest, my discussion will occasionally refer to the supplemental PowerPoint presentation beginning on slide 27. Let’s start this morning with the balance sheet changes.

During the third quarter, average loans grew $110 million or 3%, investments and short-term interest-earning assets increased $31 million or 3%, and mortgage loans held for sale declined $11 million or 15%. In aggregate, average earning assets climbed $121 million or 3%, the earning asset yield fell 8 basis points, with commercial and consumer loan yields both down 13 basis points, and the mortgage loan yield up 3 basis points. We saw quite a bit of excess liquidity although we are working our way through it. The repricing of the home equity campaign in the first half of 2008 is complete. The near-term negative impact of the recent Fed rate decline has not yet been felt.

On the liability side of the equation, average deposits increased $37 million due to the deposit campaign and ANB, though period end deposits were down $102 million. It’s important to note that average non-interest bearing deposits grew $52 million or 11% on a linked quarter basis and up about the same on a period end basis.

Our short-term borrowing position increased $119 million primarily at the IBERIABANK subsidiary, while Pulaski maintained excess cash. We continued to lower many deposit rates during the quarter, particularly related to the deposit campaign. The average rate on interest-bearing deposits declined 23 basis points, while total interest-bearing liabilities dropped 20 basis points. This 20 basis point decline in liability cost exceeded the 8 basis point earning asset yield decline, so our spread improved 12 basis points. The non-interest deposit growth added to the margin as well. The net result being 14 basis point margin improvement to 3.01%. For the month of September 2008, the margin was 3.08%.

While the interest rate environment seems to be in a constant rate of flux, we still believe we may have additional margin improvement in the fourth quarter. Our investment portfolio increased $47 million or 5% between the end of the second and third quarters. The investment portfolio’s percentage of total assets dropped back down to 17% after briefly touching 18% on June 30. The portfolio’s modified duration edged up from 2.9 years to 3.2 years.

Unlike many in the industry, our unrealized loss in our bond portfolio improved during the quarter from a $2 million unrealized loss at June 30 to close to breakeven at September 30. As a reminder, we hold in our portfolio some pretty plain vanilla securities, primarily agency paper and municipals.

As we stated previously, we don’t hold Fannie or Freddie preferreds, equities, corporates, trust preferreds, CDOs, CLOs, SIVs, hedge fund investments, auction rate securities, whole loans, private-label CMOs, Level 3 assets, toxic subprime Alt-A or second lien elements in our portfolio. Some repricing information is provided on slide 29. As shown on slide 30, we are mostly -- modestly asset sensitive as a result of the excess cash generated by the deposit campaign and the ANB transaction, and the rapidly declining interest rate environment.

Turning to the mortgage business, as shown on slide 32, jumbo and conforming mortgage rates spiked recently. Jumbo mortgage spreads to conforming product remain extremely wide. Refi activity has slowed considerably falling to about 18% of originations recently. We are the largest FHA lender in Arkansas, so the market shift out of subprime Alt-A and other products into FHA has been to our benefit. More than half of our production is FHA/VA.

Our mortgage production during the quarter was down 19% on a linked quarter basis, while loans sold were down 9% and gains on sale were up 6% as spreads remained favorable. We provide some historical quarterly trending in mortgage revenues on slide 33. Originations have eased due to both seasonal and general housing slowdown. As a result, the locked mortgage pipeline has edged down further from $70 million in the second quarter to $61million at the end of the third quarter. The mortgage business had a good quarter, but we’ve seen slowdown recently.

Revenues from the brokerage and title businesses were each down about $300,000 on a linked quarter basis. Residential title activity is very slow while our commercial title activity has been choppy. For your information, we provide historical quarterly title revenue trends on slide 34. ATM fee income and service charge income demonstrated good results for the quarter.

Total non-interest expense has increased about $3.3 million or 8% on a linked quarter basis. The increase was driven by three non-recurring items. First, ANB merger charges were about $1.8 million, that’s an increase of about $1 million over the second quarter. Second, we incurred about $400,000 in one-time cost associated with the closure of our Prairieville office, which was one of the branches opened during our branch expansion initiative. Finally, we incurred about $100,000 in cost associated with Hurricane Gustav. We think we are about done with the ANB merger related cost and we don’t anticipate any of the other expenses to be of recurring nature.

From an expense line item perspective, which would include those three items I just mentioned, compensation cost increased about $900,000 or 4%. We experienced significant increases in occupancy and equipment, which were up about $1 million or 18%. OREO expense up about $400,000 or 374%, and legal and professional fees were up about $400,000 or 32%. Other expenses remained well contained.

So, for the bottom line, we reported $0.68 for the diluted EPS in the third quarter of 2008 compared to $0.74 in the second quarter. Excluding the merger-related expenses of $0.09, the Prairieville branch closure of $0.02 and the Gustav cost of $0.01, we earned about $0.80. The First Call reported estimate for the third quarter 2008 was $0.79 per share.

Our Tier 1 leverage ratio was 7.29%, that’s up 5 basis points. And total risk-based capital ratio was 11.07%, that’s up 68 basis points. Early in the third quarter we completed a $25 million subordinated debt issuance at the rate of three-month LIBOR plus 300 basis points maturing in seven years.

We purchased no shares of our stock during the quarter. Our Board declared a quarterly cash dividend of $0.34 per share, unchanged from last quarter. The dividend yield was about 2.80%. We are researching the merits associated with the TARP program and have made no final decisions in that regard, though on the surface it does appear to be a relatively attractive potential source of capital to finance, organic, and external growth.

On slide six, you see our outperformance in stock price relative to the major indexes. We believe a differentiation in quality will continue for a while. Yesterday our stock price closed at $48.50 per share. It’s about the same level at this time last quarter. This closing price equated to 1.21 times our September 30 book value of $39.96, which by the way was up $0.47 per share this quarter or about 1% -- and up about 6% within the last year.

So in summary, we believe our bond portfolio is in great shape, of significantly less risk than the other banks and very liquid. The Pulaski builder portfolio continues to work its way down. We have substantial liquidity such that we are ready to fund future loan growth, which would drive future earnings. High quality loan generation continues to look very promising.

Our exposure to construction and land development lending is extremely small. We are slightly asset sensitive and we operate in great but balanced markets. The local combination of stable local economies, low unemployment, modest housing prices, favorable housing supply and demand balance such as indicated in Lafayette on slide 45, limited consumer debt stress, and reasonable competition provide a favorable operating environment for our company.

We believe we remain in a fairly unique position within our industry. We also believe our industry is experiencing unprecedented upheaval. The government agencies are taking aggressive actions that we hope will bring stability and positive change, and we are pleased to be an active participant in this process.

I’ll now turn it over to Anthony for his credit commentary. Anthony?

Anthony Restel

Thanks, John. As with other presentations, I’m going to discuss the company’s overall credit quality in the third quarter. Consistent with prior quarters we have provided the majority of the information I will discuss in the supplemental material presentation.

I’ll start with a review of the consolidated credit metrics and then will provide a quick update on several areas including the Pulaski builder portfolio, our exposure to the oil and gas industry, and then some overall comments about our consumer portfolio. From a consolidated standpoint, our credit quality remained strong and was consistent with the second quarter. During the quarter, consolidated non-performing assets increased $1.5 million to $43.4 million. Accordingly, NPAs to total assets within $0.81 basis points compared to $0.79 on a linked quarter basis.

The reserve coverage of non-performing loans stands at 1.28 times, relatively unchanged from 1.24 times at June 30. Additionally, consolidated past dues greater than 30 days, including non-accruals, improved to 1.24% compared to 1.38% last quarter and 1.66% at year-end.

Net charge-offs ran at 26 basis points during the quarter, an increase of $1.3 million or 137% higher than the second quarter. The vast majority of the charge-offs during the quarter are related to the write-down of foreclosed property being transferred into the bank’s OREO portfolio. The bank’s consolidated watch-list ended the quarter at $62 million, down from $71.2 million at June 30 and $86.4 million at year-end. Included in the supplemental presentation on slides 13 and 14 are graphs that provide the trend in classified assets over the last several years.

Taking a look at the banks independently, we continue to experience very strong credit metrics in the Louisiana at IBERIABANK. At IBERIABANK, non-performing assets remained flat with first quarter – second quarter at $8.3 million or 22 basis points of total assets. Past dues greater than 30 days inclusive of non-accruals were 49 basis points and consistent with recent low levels. We did recognize a slight uptick in the 30 to 60-day past due in the indirect portfolio at quarter-end as a direct result of Hurricane Ike and Gustav. As many of the impacted markets were reassembling and/or cleaning up, paying bills became a secondary concern for many trying to get their lives back in order. We believe these past dues will return to normal levels during the fourth quarter.

From a commercial standpoint, our watch list stands at $17.2 million, the lowest level in the past six years. We see no signs of deterioration with the IBERIABANK loan book. At Pulaski Bank & Trust, the non-performing asset at September 30 increased $1.2 million to $35.1 million compared to June 30. At September 30, NPAs were 2.23% of total assets, up from 2.12% at the end of the second quarter. With the non-performing assets, Pulaski had increased the non-accrual loans of $4.2 million, offset by an increase in accruing loans greater than 90 days past due of $2.8 million and an increase in OREO of $2.69 million.

I will now review a few select items within the portfolio that are worth covering. First, I’ll start with the brief recap of the Pulaski residential builder portfolio. I would remind all on the call that the detailed breakdowns of the portfolio are available in the supplemental presentation on slide eight. The Pulaski residential construction builder portfolio declined by $10.3 million or 23% to $34.6 million during the quarter. This portfolio represents 0.95% of our consolidated loan portfolio. The remaining $34.6 million is comprised primarily of new home construction, with only $4 million of sub-division development loans and $6 million in lot loans.

On a geographic basis, our greatest exposure is in the Memphis market, Little Rock, and Northwest Arkansas, representing our next largest markets by exposure. Approximately 7% of the homes in the portfolio are still under construction. 39% of the portfolios are non-accrual status at the end of the quarter. We are very encouraged by our progress on reducing this portfolio with less than 1% of our outstanding loan portfolio, although we experienced a slightly higher level of loss associated with the transfer of homes into OREO in the quarter as appraisals reflected lower values than previously assumed. We continue to believe that moving these properties into OREO provides the best means for quickly disposing of the properties and limiting our ultimate loss on these loans. Our reserves and discounts to total loans in this portfolio are 8%.

Overall, the disposition of the portfolio continued to occur as planned. One time that you may be curious about is our energy exposure in the loan portfolio, using the Masters code, 2.11 oil and gas extraction, 2.12 mining, 2.13 support for mining, and 4.83 water transportation to quantify what counts as energy exposure. We calculate our energy exposure at $80.1 million or about 2.2% of the consolidated portfolio.

As Daryl has mentioned numerous times, we are very careful in selective lending to this industry, given the volatility that has occurred in the past. We believe the company that we lend to in the sector remained very strong and should have no issues weathering a lower-priced level for oil and gas. We have no past due credits in this portfolio. We could talk more about the oil and gas price impacts on our economies during the Q&A session if desired.

The next item I’d like to cover are the home equity and indirect portfolios. We briefly touched on these areas during the last conference call. You will notice in the press release as well as in the supplemental PowerPoint presentations on slide 19 through 26 that we have again provided basic information such as credit scores and loan-to-values within the portfolio.

Geographic concentration and current performance within the portfolios relate to past dues and charge-offs. This information should provide you comfort that these portfolios continued to perform very well, and we have not experienced any change in credit trending within the portfolios. To a large extent, the markets we operate in have provided a material cushion against large-scale credit erosion that may be happening in other national markets.

Like other banks, we continue to monitor our credit very closely in the extraordinary times. We recognize that an economic slowdown will eventually trigger its way into our economies in ways such as lower oil prices in South Louisiana and slower tourism New Orleans. It is impossible to know exactly what may or may not happen. I can’t tell you that IBERIABANK has consciously avoided significant concentration in these areas for this exact reason. We are proud of the fact that we have actively pulled back on lending over the past 18 months to areas or industries we worried about.

The good news is that that our loan portfolio continues to perform well, but builder portfolios compressing as expected, and overall credit quality remains consistent or better than prior quarters. One other point, our regulatory advanced by the Federal Reserve, our Louisiana State regulators at the OFI and the office of direct [ph] supervision were completed during the quarter. I would characterize these exams as routine.

I would now turn the call over to Michael.

Michael Brown

Thanks, Anthony. I’m going to provide a general update on the market performance during the quarter. As previously noted, the quarter certainly proved as an interesting one, and in many respects it was business as usual. Many of our markets continued to see reasonable loan growth as pipelines built early in the year flowed to closing and economies continued to move forward.

On a consolidated basis, loan growth for the quarter was around $89 million, which equates to annualized growth of about 10%. Within the portfolio growth in CRE, I’ll note that the vast majority of that growth in the quarter was from lower risk owner-occupied real estate. And that’s pretty consistent with where that growth has come from for the entire nine months.

Since the beginning of the year, loan growth was 199 million. That was around 8% annualized. The nine-month numbers were adversely impacted by the sale of credit card receivables in the first quarter this year. A run-up in the Arkansas construction portfolio and some general repositioning of the Arkansas loan portfolio tied to the acquisitions.

For the quarter, the largest contributors to our growth were Lafayette, Baton Rouge, and Memphis. Both Memphis and Baton Rouge are benefiting from our earlier recruiting efforts and have strong upside as we continue to move market share from competitors. For the nine months, the primary contributors to growth were New Orleans and the Northshore, Lafayette, Shreveport, Baton Rouge, and Memphis.

We focused market growth on borrowers in industries that we feel that would be less impacted by a slowdown in economic activity. And as Anthony mentioned, we’ve also gone through a process over the last few years of calling out businesses and industries that we don’t feel would tolerate a downturn, obviously helping our credit risk profile.

At the same time, we have also focused on weaker competitors and their best personnel and clients. Share movement will always be a fundamental underpinning of our business strategy. We do expect to continue to move share from weaker players, the new activity not already in the market will likely be slowed. This will have some impact on loan demand going forward into 2009. But the good news is that we are heading for the rest of this year and into next year with a good pipeline in most markets.

From a deposit perspective, I would remind you that we ran a deposit program earlier in the year covering most of our markets. Despite these deposit rates we are setting down, which has had a very positive effect in margins obviously, we held on to 80% of the deposits from this campaign and 89% of the accounts. Considering the market environment, we feel this has been very successful and the timing of this program, as I’m sure, appears where the test was actually exceptional. The campaigns particularly help to our efforts to grow the new branches, which we built post Katrina. I’ll discuss them shortly.

Overall deposits were down around $102 million during the quarter due to repositioning rates in our markets. That’s still up $450 million from the beginning of this year. Deposit rate has been very strong and our retail franchise with gains in all markets. In fact, based on the latest FDIC numbers, IBERIABANK grew market share in all markets with the exception of one. We also saw a strong year-to-date deposit growth in our commercial business, which more than offset a decline in the more price sensitive institutional deposits.

From a new branch perspective, we saw run-up from the deposit campaign of about $14 million during the quarter ending September with $188 million in deposits. This decline was to be expected considering the rate recess that occurred. Loans increased, however, during the quarter by around $18 million as we continued to gain traction with the clients. With improvements in interest income and lower interest expense, the new branches are reporting improvement in bottom line performance. I think that it is important to note that prior to corporate validations, a number of branches are moving very close to profitability despite being only opened 24 months or so.

Our first branch office, which opened in (inaudible) immediately after Katrina, is well into the black, even after considering allocations. We had just passed the three-year anniversary of this opening. I remind you that we continued to evaluate the performance of all branch locations, new and old, and that those that are proving unattractive are being addressed. As mentioned earlier, we did close our Prairieville location during the quarter testing for that.

In summary, our markets are focused on becoming more profitable, with a strong focus on high quality loan growth, better deposit mix, cross sale of products throughout the franchise, continued strong credit quality and opportunistic recruiting efforts. We feel that we are reasonably positioned to weather the economic climate change.

And with that, I’m going to pass to Daryl.

Daryl Byrd

Michael, thanks. Without question, these are unprecedented times for the financial services industry. We’ve given up on significant spread income over the past few years because we were not comfortable with the risk characteristics of marginal investment and credit opportunity. It’s in times like this conservative approach differentiates us from other institutions. These unprecedented times also prevent interesting opportunities. We believe significant industry consolidation will occur aided by government-assisted transactions. We find the TARP program intriguing. We are currently scrutinizing this program to determine our level of interest in participating in the program. I’ll now open the call for questions. Eliza?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question comes from the line of Jennifer Demba from SunTrust. Please go ahead.

Jennifer Demba – SunTrust

Thank you. Good morning.

Daryl Byrd

Good morning, Jennifer.

Jennifer Demba – SunTrust

Just wanted to get your thoughts, given the economy in general deteriorating, were you – what your thoughts were on reducing the loan loss reserve during the quarter a little bit and where you see it going maybe over the next few quarters?

Daryl Byrd

Jennifer, I’ll start and Anthony will probably join in with this one, or Michael. Jennifer, first, you got to look at the different markets we are in. As Anthony and John discussed and Michael discussed in some of their comments, legacy market is doing quite well. And our credit quality in this market is exceptional. If you go up to Memphis and Arkansas, those economies perform more with the national norm, but we’ve made significant progress in terms of our credit quality, as we reported this morning. And so as you look at the various statistics and you look at the – we’ve given you in the supplemental data good bit of information about our past dues, the different portfolios, and about our classified assets. All those numbers are trending in a very favorable light. As always, we consider ourselves adequately reserved, given all of the circumstances that you have to take a look out. I’ve probably said too much. But Anthony, Michael, do you have anything to add to it?

Anthony Restel

Yes. Jennifer, the other thing I’ll remind you is that we have roughly about 8% reserve on the Pulaski builder portfolio. So that portfolio declined. We are not going to be putting up 8% reserve against the replacement items that come in. So you have to think through the dynamics as the portfolios changing at Pulaski a little bit.

Jennifer Demba – SunTrust

Okay. One more question for Michael. Will you give us an idea of how much loan growth you experienced in the Memphis market you’re your new team there during the quarter?

Michael Brown

Yes. They ended with -- the supplemental information gives you a sense for – I think it was – John, remind me.

John Davis

Slide 36.

Michael Brown

Slide 36 gives you a sense, Jennifer, for the size of the portfolio. We’ve had very good loan growth from that group. When you look at funded loans and pipeline, we are already over 100 million. And that’s a 90-day pipeline for that group. The deposit has been the exceptional as well. That’s one thing that’s moved quicker than we expected frankly. I think that ended the quarter around 17 million. We think we’ve been really, really positive about that group. That is an exceptional addition to our team.

Daryl Byrd

Jennifer, we are very, very happy with them.

Jennifer Demba – SunTrust

Okay, thank you.

John Davis

Hey, Jennifer, let me mention one other thing. I thought it sounded kind of interesting. On slide 45, where we are showing Lafayette home inventory levels. Not only is Lafayette at a level 40% below, the national average as far as the month’s supply of housing. But those have been trending down throughout the year. So it’s been favorable kind of running kind of what you see in the rest of the country.

Jennifer Demba – SunTrust

Okay, thank you.

Operator

Thank you. And the next question comes from the line of Bryce Rowe from Robert W. Baird. Please go ahead.

Bryce Rowe – Robert W. Baird

Thanks. Good morning, guys.

Daryl Byrd

Good morning, Bryce.

Bryce Rowe – Robert W. Baird

John, could you help us out with the distribution of these non-recurring expenses within the income statement? And then the second question is for Anthony. Anthony, the Pulaski net charge-off, looks like they were 2.1 million or 2.2 million. If you could help us with what percentage of that or how much was builder related?

John Davis

Bryce, I’m afraid I might have to get back to you on the breakout of these expenses because I don’t think we have that with us right now. I have to dig through though.

Bryce Rowe – Robert W. Baird

Okay, thanks.

Anthony Restel

Bryce, I don’t know the exact dollar amount right off the top of my head. I’ll say that it’s vast majority of it and kind of working through the builder portfolio.

Bryce Rowe – Robert W. Baird

Okay. And –

Daryl Byrd

We are kind of at the bottom of the barrel with that stuff. So –

Bryce Rowe – Robert W. Baird

Sure. Thanks guys.

Operator

Thank you. And the next question comes from the line of Dave Bishop from Stifel Nicolaus. Please go ahead.

Dave Bishop – Stifel Nicolaus

Hi, good morning, gentlemen.

Daryl Byrd

Good morning, Dave.

Dave Bishop – Stifel Nicolaus

Mike, I think you’ve touched upon this briefly, but maybe you can give us an outlook in terms of what you are looking for as you budget into ’09 in terms of maybe total loan growth, and where do you expect a lot of that to come from by product and by market maybe?

Daryl Byrd

Dave, I’m going to jump in. I don’t know that we’re going to – we can provide kind of ’09 guidance in that regard. What I would probably say is that if you look at us, we’ve consistently produced double-digit loan growth. We’re having very, very good success right now. And as I said in my opening comments, the pace we have in place across each of our markets is absolute to the best at any point in the franchise. And they are producing exceptional results for us. Michael, do you want to add –?

Michael Brown

Sure. It’s good to be the CEO. Just real quickly, Dave, what I would just is, as Daryl said, we have seen very good loan growth. We have been inherently conservative in terms of the client base we have gone after. One of the benefits of picking up good recruits and ended the (inaudible) markets and having a good team in place in all the markets is that we’ve been able to be selective in terms of the growth that we’ve been able to get. We are frankly benefiting right now with those teams in place taking business away from competitors due to perhaps capital considerations or liquidity considerations, or letting some of the better borrowers go. I think that that is definitely going to continue into ’09. And as a result, it will be beneficial to our loan growth. We’ve obviously, as I noted Jennifer’s question, had good success with the Memphis team. And we continue with our recruiting efforts in certain markets where I think we can get some value-added additions to the team. Just generally in terms of where we are focused, we are focused on what I would define in this general comments, strong operating businesses. And those are the ones that have very strong cash flow characteristics, good supporting liquidity outside of the stock market in terms of guarantor support. In terms of specific industries, healthcare is one that we focused on. We feel that that will be less impacted by the economic ups and downs. Multi-family is another one that we feel reasonably good about right now. And then what a general catchall I’d define as high net worth. And they are still continuing to be very active as they grow. And frankly, I would expect that group to be more active growing into ’09 as they see value buying opportunities in different businesses or industries. And we’ll be there to support them.

Dave Bishop – Stifel Nicolaus

Got you. And then maybe Anthony can go into the outlook in terms of the impact of the decline of the price overall, (inaudible) that affecting from the local economy down there?

Anthony Restel

What I’ll tell you, Dave, I think you got a – in particular, if you look at oil, a little bit different than kind of what you might be thinking from a national perspective. If you think of (inaudible) 20 years, the average price of oil when you judge from inflation, it was running about $40 a barrel up until two or three years ago and we kind of skyrocketed up to $140 and come down to $70. Two fundamental things are really different if you look at the oil industry, kind of what’s going on in Lafayette today versus back in the ‘80s, which Daryl talked about extensively in the past. One, the oil service companies, which is really what we have in Lafayette, those companies aren’t leveraged to the same extent they were. And they are blessed that times have been so good they relatively flush with cash. We see that in our borrowers. If you look at our outstanding commitments we have or the debt that’s out and we compare that to a relative level of deposits, it’s a pretty healthy number. What I’ll tell you is oil at $70 a barrel is still fairly attractive for most people. But nevertheless we should expect to see a slowdown in overall oil spending from the independent people. That will have a triple impact as it kind of works its way through the service company. And that could lead to some differences and more people are paying whether it’s bonuses or staffing levels. But overall what I’ll tell you is if you think about service and supply, when you think about building rigs, when you think about pipeline support, those are all lagging to kind of drilling activities to a large extent. And those companies are going to do fairly well for a little bit of time here. If you look at the depressed oil price over a longer period of time, obviously that can change things. I think near-term I’m not expecting to see significant trauma, if you want to call it that from oil moving from $140 to $70, and I think people kind of over-planned how bad that has really been.

Daryl Byrd

That’s really a short-term kind of problem. Anyway, Dave, one thing interesting – Anthony asking to produce a slide we thought that we didn’t put it in the supplemental. If you go out on and look at Bloomberg and look at price of oil over the last 25, just ask them to go back to the year I came to Louisiana, ’85, they are only four years, oil has exceeded $40. So we’ve had an awful lot of years and lot of success in these markets in South Louisiana and years where we didn’t have anything near the pricing. With that said, and as Anthony and I think Michael both commented on the call, we started a couple of years ago taking a hard look at the different portfolios that we had in South Louisiana and adjusting our thoughts around those portfolios to be conservative and anticipatory of a time when oil pricing would fall back. I think we’ve done a good job and I think that’s what you always have to do. You can’t make moves at the time the price falls. You’ve got to be ahead of the game and start that several years in advance. I think we’ve done a good job of being disciplined in that regard. And again, if you look at our portfolio, as I’ve said several times, we try not to do too much of anything and be pretty conservative in our approach to that and be very (inaudible).

Michael Brown

I must point out one other comment. It’s interesting when you spend time with folks in the industry in terms of what their price expectations have been. As I had looked at individual projects, particularly on the longer-term projects, and none of them followed the price up beyond $100. We still haven’t even reached the point which they were using for their expectations for project development. I think many in the industry felt that the prices were up for speculative purposes. They were just not reasonable or realistic. So I think that that also will help in terms of lowering the impact.

Dave Bishop – Stifel Nicolaus

Great. Thank you, guys.

Operator

Thank you. And the next question comes from the line of Chris Marinac from FIG Partners. Please go ahead.

Chris Marinac – FIG Partners

Thanks. Good morning. I want to delve into Michael’s comment earlier in the call about owner-occupied real estate growth. And Michael, I’m curious, to what extent has or have LTVs changed? Are you doing anything more conservatively than you would have earlier this year or last year, or is it relatively same?

Michael Brown

We are more conservative across the board. And I guess I would emphasize, and Anthony mentioned in his comments, that for us it’s been an iterative process. As we see in excess of development [ph] in particular segments or industries, we’ve adjusted our underwriting standards that it’s cost us some clients or some business opportunities that we felt that the risk was changing or evolving beyond the point that we felt was reasonable. And I mean, the builder portfolio here in Louisiana is a perfect example. We started cutting back on that about three or four years ago by basically changing loan-to-value expectations and liquidity requirements and underwriting expectations for our clients. And as a result, frankly, that portfolio has reduced. But again we felt that that was the right thing to do. And we continue to do that as it relates to all of our business, and that has impacted loan-to-values and cash equity contributions, and frankly the types of borrowers that we will lend to.

Chris Marinac – FIG Partners

Got you. And you have –

Daryl Byrd

And Chris, remember, when we make decisions like that, we are giving up margin that others don’t have.

Chris Marinac – FIG Partners

I understand. And then just wanted to follow up on the owner-occupied piece. Even just – imagine on slide 17 about how non-owner occupied is 150% of the killing capital. Do regulators give you any feedback that that number should be even lower and even less the concentration than it is today, or do you feel that number might still kind of hold on as you manage the company in the future?

Anthony Restel

Chris, we’re not getting any concerns over our level at where we are today.

Chris Marinac – FIG Partners

Okay.

Daryl Byrd

And Chris, remember, we’re pretty conservative.

Chris Marinac – FIG Partners

Sure. I understand. All right.

Anthony Restel

And one comment, and I think this is important, is in non-owner occupied real estate, not all things are the same in terms of the take. There is obviously a significant difference between certain types of projects. And then again we’ve been very conservative in terms of how we have underwritten those loans.

Chris Marinac – FIG Partners

Great. Thank you guys.

Daryl Byrd

Thank you.

Operator

Thank you. (Operator instructions) And you do have a question from the line of Matt Olney from Stephens Incorporated. Please go ahead.

Matt Olney – Stephens Incorporated

Yes. Good morning, guys.

Daryl Byrd

Good morning, Matt.

Matt Olney – Stephens Incorporated

You mentioned on the last question that you’ve lost some opportunities just increasing your underwriting standards in recent quarters. What about in terms of pricing? Have you attempted to raise the pricing on your senior customers that would have any pushback in recent quarters and what has been the feedback on that?

Daryl Byrd

I’ll start and then Michael will want to jump in on this one as well. I’ve been pretty consistent in my comment on this. We’ve been asked this one several times. Strategically, particularly from a C&I perspective or commercial perspective, we like clients that had been around, that have liquidity, and have strong operating histories. And we want to bank those kind of clients. We want to retain those clients for a long time. So we’re going to be very careful in the way we handle pricing with those types of clients. We do realize it’s a bit of sellers’ market. And we understand the dynamics in the industry around that. And there probably are some opportunities that afford us in that regard. But we’re going to be very careful. We are not about to gouge good client in this kind of environment. That’s absolutely the wrong thing to do. We are trying to build strong relationships with solid people that are going to be around for a long time. And so we are pretty thoughtful and I think pretty careful with that. And frankly, in terms of the margin we’ve given out, if you look back, we started talking about kind of the abundance of construction and land development lending about four years ago. I think we were pretty thoughtful in terms of not taking on that kind of risk, let alone some of the risks people take on in their bond portfolios. So it’s more than a few quarters that we’ve given up fairly significant income relative to peers. And we think that was a wise decision, a kind of decision we’ll continue to make in this franchise. Michael?

Michael Brown

You just referred to them. We have seen spreads widen, as you can imagine, certainly in the last 60 days. That has really been driven by a combination of factors, say, the market as a whole in terms of liquidity, availability fronts and the impact in terms of competitive forces. And I would expect that that would continue certainly through the rest of the year.

Matt Olney – Stephens Incorporated

Okay. And secondly, in the prepared remarks I believe there was a mention of some benefit from the slide [ph] to quality on deposits. Could you go ahead and give us some more color on that and what you see in your markets?

Daryl Byrd

You are just seeing a lot of people nervous about their buyings. Obviously we’ve been the acquirer of – we’ve assumed the deposits of a failed bank and I guess that leaves us in some of our markets being viewed as pretty stable, and our conservative operating history I think leaves us in great shape. So we’ve been fortunate. We had – we’ve been more stable in deposits that move in line in this kind of market.

Matt Olney – Stephens Incorporated

Thanks, guys.

Operator

Thank you. And your next question comes from the line of Ross Haberman from Haberman Fund. Please go ahead.

Ross Haberman – Haberman Fund

Good morning, gentlemen. How are you?

Daryl Byrd

Doing fine, Ross. How are you?

Ross Haberman – Haberman Fund

Okay. Could you – I was wondering if you could delve into I guess the local markets in Louisiana? And given what you are seeing there, could you just sort of touch upon – I guess touch the Lafayette, but New Orleans and Baton Rouge and some of the other local markets? What stronger than others, and do you think in this crunch – this credit crunch that you guys given your location or given what’s happening in the state and do better than the rest of the country over the next year or so?

Daryl Byrd

Ross, we’ll say (inaudible) pointed out I think John has got a slide in the supplemental materials, we are very fortunate to operate in markets that have some of the lowest unemployments in the country. Very fortunate in that regard. John also mentioned the housing dynamic in the Lafayette marketplace being pretty attractive. You’ve got a resurgence in New Orleans. I’ve said this consistently for the last 18 months, two to three years, that I think New Orleans is going to come out of this very strong and I think that’s happening. Baton Rouge is doing very well. Lafayette is doing very well. You go up to North Louisiana, particularly the Haynesville Shale that’s been an interesting opportunity for that market. And then you have some other dynamics going on, particularly relative to the military that’s pretty attractive. So we’re blessed that our Louisiana markets are doing very well.

Ross Haberman – Haberman Fund

Just one follow-up. Did you have much damage -- I guess hurricane hit Baton Rouge harder, I guess harder. Well, do you have any damage there or any effects from that?

Daryl Byrd

You had some coastal flooding in the low lying markets. The storm was certainly not much fun for the folks in Baton Rouge. An aggravation. It was kind of a category two-ish kind of storm. Again, that’s no fun and it was painful for that market, but not kind of a devastating storm that we saw with Katrina and Rita.

Ross Haberman – Haberman Fund

Okay. Again thanks for the color.

Daryl Byrd

Thank you.

Operator

Thank you. And you have no more questions in queue at this time. Please continue.

Daryl Byrd

Folks that we are finished, as always, we appreciate your interest in today’s call and your support of our organization. I certainly hope that each of you have a great day. Thanks.

Operator

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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