IBERIABANK Q4 2008 Earnings Call Transcript

| About: IBERIABANK Corporation (IBKC)


Q4 2008 Earnings Call

January 21, 2009 9:30 AM ET


John R. Davis - Senior Executive Vice President, Director of Financial Strategy, Mortgage, & Title Insurance Companies

Daryl G. Byrd - President and Chief Executive Officer

Anthony J. Restel - Senior Executive Vice President, Chief Financial Officer and Chief Credit Officer

Michael J. Brown - Senior Executive Vice President and Regional Market President


Matt Olney - Stephens Inc.

Brian Hagler - Kennedy Capital

David Bishop - Stifel Nicolaus & Company, Inc.

Jennifer Demba - SunTrust Robinson Humphrey

Brett Villaume - FIG Partners


I would now like to turn the conference over to your host Mr. John Davis. Please go ahead.

John R. Davis

Good morning and 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 CFO and Chief Credit Officer.

I hope everyone has had an opportunity to obtain a copy of the company's press release we issued late 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 the press release, you may access the document from our website at www.iberiabank.com, under Investor Relations and then Press Releases. The link to PowerPoint presentation is also available on our website in the IR section under Investor Presentations. A reply of this call will be available until midnight on January 28th, by dialing 1-800-475-6701 with the same confirmation code as this current call mainly 978860.

And our discussion this morning deals with both historical and forward-looking information and as a result, I'll recite our Safe Harbor disclaimer. To the extent that the 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 the management's current expectations and the current economic environment.

IBERIABANK Corporation's actual 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.

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.

And at this point, I'll turn it over to Daryl for some introductory comments. Daryl?

Daryl G. Byrd

John Thanks. Good morning. We have much to cover today, so we'll get right into it. Let me begin by saying the underlying results for the quarter were very good, particularly in light of conditions of the banking industry and the economy in general. While our seasonal mortgage and title insurance businesses were soft, they turned up nicely at the end of the quarter and should have a very positive influence for 2009.

We experienced strong loan growth and continued margin improvement. While deposits stagnated on average balance during the fourth quarter, deposit balance has accelerated near the end of the quarter, particularly through our non-interest bearing deposits.

Overall, I'm very pleased for deposit and loan growth for the quarter and for the year. Our Arkansas acquisitions are complete, fully integrated and assimilated and are operating well. The Pulaski builder portfolio which we've talked about at late over the last year has now compressed from a 113 million at due diligence to 28 million at year end, equating to only 75 basis points, half of our total loan portfolio. Through our aggressive actions, the portfolio has been reversed and neutralized to become fairly insignificant.

As evidenced by this portfolio and shown many times over the last nine years, when we have an issue, we do it directly and aggressively. Unfortunately, unexpected events surfaced late December, which we have been unraveling during early January that started to tarnish the good underlying results for the quarter. While I am deeply disappointed to report this issue, we are dealing with it aggressively and in a manner consistent with prior conservative culture. We've said many times, every company faces issues, what matters most is how those issues are addressed.

While I will provide a brief description of the issue and my colleagues will elaborate on it further in a minute, we're still in the discovery phase and for legal reasons, we will be limited in our commentary.

In summary, we had $4 million in loans to our client in Arkansas, we believe to be secured by marketable securities and real estate that became 30 days passed due in early December. The client was well known in local community and has done business with our company at our predecessor organization for over 15 years. We believe the loans were well underwritten and our collateral was sound and reasonably secured.

We discovered that the client engaged in substantial fraudulent activities that gave us great concern regarding the ability and the willingness of the client to repay the debt and question the true value of the underlying collateral. We will vigorously pursue our claim against the client and our insurance area (ph), although the outcomes in that regard are uncertain at this time. As opposed to treating this issue for financial reporting purposes, as in events subsequent to year-end results, we thought it was prudent charge-off the amount of the credit secured by the questionable collateral.

Given the material nature of the credit for 30-day pass due status at year end, the discovery of our concerns in the reasonable proximity of the year end and the fact that we have not yet closed financial books, we thought it appropriate to incorporate the charge in the year-end results. Pieces of that fraud such as the one we face take significant time to resolve. We will periodically update you regarding our progress in this resolution of this credit but we ask for your patience.

Exclusive of this disappointing issue, we showed great promise in many areas. You may recognize the positive developments for the quarter mentioned earlier were also not our priorities that are set at the beginning of the year. I was very pleased with the progress on those fronts and our overall results for the fourth quarter and the full year. Let me provide you a quick reminder of a few of the accomplishments, we achieved during the year.

We had total loan growth of 318 million or 9% during the year, total deposit growth of 511 million or 15%, including a successful deposit campaign with our shelf registration safe and in various four different forms of capital with net proceeds totaling 231 million. We reported earnings of 8 million for the quarter and 40 million for the year, despite many severe economic headwinds.

We shifted from an unrealized gain in our bond portfolio of 9 million to a $20 million gain, while many banks started experiencing severe losses. We paid off short-term borrowings, and via long-term swaps we locked-in low cost regulatory capital and at an amazing 4.98% pre-tax rate for 26.5 years. We compressed the Pulaski builder portfolio of about 55%, from 62 million to 28 million. We experienced strong mortgage origination volumes with improving spreads during the worst housing market in over 70 years. We sold 31 million of unsecured credit card receivables at a 23% premium. We lowered NPAs from 98 basis points of as touched to 83 basis points of assets, contrary in direction to the industry.

We successfully acquired and integrated the Phil (ph) bank at a very favorable price. We weathered the ups and downs of unprecedented energy prices and another large hurricane. We acquired a dynamic team in Memphis and added to our teams in Baton Rouge and Monroe.

We increased share dividend roughly a 1.5% from a $1.44 to $1.46 per share, at a time when many companies slashed or eliminated dividends. We delivered a share price up 3% when the industry was down 25 to 50. And we've had annualized net charge-offs for the year of 28 basis points, which includes the charge-off related to the fraud. Excluding the fraud related charge-off, annualized net charge-offs would have been 18 basis points.

Importantly, I believe we are extremely well positioned for the road ahead of us. We have a truly fortress balance sheet with exceptional capital strength, tremendous liquidity, core funding and superior asset quality. We continue to experience strong loan and deposit growth, favorable deposit pricing and fabulous strategic recruits. We also possess many unique operating characteristics including geographic diversity, local economic strength, favorable housing markets, extremely low construction and land development exposure, a plain vanilla bond portfolio conservative culture and seasoned leadership.

We believe this combination places us in an unparalleled position relative to the industry. We remain one of the few companies on the offence in a period when many in the industry are very pensive and simply thriving to survive. We are in this favorable position due to the foresight, leadership, diligent efforts of our Board of Directors, advanced through board's leadership chain and our associates. As always, I appreciate the hard work of all of our people.

At this point, I'll turn the discussion over to Anthony to cover our credit results for the quarter. Anthony?

Anthony J. Restel

Thanks Daryl. I'd like to start my discussion with a brief review to the loan fraud disclosed in the press release. My comments will be limited today due to the few factors including the ongoing discovery process as well as our investigation and the investigation of our attorneys which is going on.

The loans in question were originated in our Northeast Arkansas market, with the earliest loan extended in 2001 and the latest one extended in 2008. The customer has been a long-time customer to Legacy Bank in the market for 15-plus years and had a strong reputation within the community as well as the borrowers with the bank.

Our loans with the borrower consist of 3.6 million of loans secured by marketable securities and 600,000 in the home equity loan. Our fraud issue was nearly 30.6 million that was secured by marketable securities. These loans were 30 past due in early December, we recognized we had collateral issues that potentially created a large unsecured situation at the time but believed that the borrowers had substantial network to eliminate the situation.

In early January, several issues caused us to question the financial status of the borrower, starting with the foreclosure notice on the borrower's primary residence. We also discovered that the collateral documentation evidencing the pledge of marketable securities against the $3.6 million loan were fraudulent.

As such, we decided that the ultimate collectibility of the $3.6 million loan was highly unlikely and an immediate charge-off was required. We believe the home equity loan is adequately secured based on the most recent appraisal we have in file and our knowledge of the housing dynamics in the market.

After a careful review of the known circumstances on this credit and other loans secured by negotiable collateral we are confident that this loan loss is the direct result of fraud and not a breakdown of our underwriting of loan process.

Since our fourth quarter financials statements have not been filed and it is apparent the loan fraud was occurring in 2008, the appropriate accounting was to recognize the loss of 2008 versus reporting in as a subsequent event of 2009. While some recovery may be possible in future periods on these loans, the timing and the amount of any recoverable is hard to predict, given what we know today. We've also provided notice to our insurance company that we intend to file of claims we ran in this fraud, at this time we aren't sure as to the timing and final disposition of that client.

I will now turn my focus over to the company's overall credit quality at the end of the year. Consistent with prior quarters, provided the majority of the information are discussed in the supplemental material presentation. I will start with a review of the consolidated credit metrics and then we'll provide a quick update on several areas including the Pulaski and Louisiana builder portfolios and our exposure to the oil and gas industry.

From a consolidated standpoint, our credit quality has remained strong and was consistent with the third quarter except for two large liquidity items, namely the $3.6 million charge offs, related to the loans that I just discussed and one commercial credit in IBERIABANK in the amount of $9.2 million that is tied to the company in liquidation. All 9.2 million is currently past due to in the 30 to 59-day bucket. The company in liquidation mode is the charter aircraft company that was formed several years ago by three investors in Northwest Arkansas.

One of the investors and primary driver of the business had substantial network that provided us costs to... The company performed as expected since inception until the unfortunate death of the primary driver and largest investor in the company. Without going through too much detail, the decision was made by the surviving family member to sell their interest within the business to a third party who ultimately decided to dissolve the business.

Today IBERIABANK has five loans with $9.2 million in credit outstanding. One loan is $600,000 revolving line of credit to cover working capital needs, secured by accounts receivable. The bank is in the process of working down the line through the collection of remaining receivables. The other $8.6 million is broken down to four loans of approximately the same size each secured by a separate carrier jet aircraft. As part of the solution process, our primary guarantor has the deposited $3.2 million or $85,000 per plane escrow at the bank to cover any shortfall that may occur if the aircraft is sold and disposed off.

After taking into account the escrow dollar, each aircraft has an effective balance of 1.3 million. All the aircraft are currently being marketed for sale. The first aircraft sale is scheduled for mid-February and no loss would be recognized after the escrow proceeds have been applied.

It is important to remember that these loans will continue to be past due until the planes are sold and could lead to an increase in non-performing assets if the disposal of the aircraft extends until the end of the first quarter or longer. The ultimate loss on this credit is expected to be immaterial.

During the quarter consolidated non-performing assets increased 3.2 million to 46.6 million. Accordingly NPAs total assets, was at 83 basis points compared to 81 basis points on a linked-quarter basis. The reserve coverage of non-performing loans stands at 1.35 times, up from 1.28 times at September 30th. Consolidated past due is greater than 30 days, including non-accruals increased to 1.63% compared to 1.24% last quarter and relatively flat with 1.66 at the end of 2007.

The aircraft loan we just discussed accounted for 25 basis points or 64% of the 39-basis point increase and quarterly past due is greater than 30 days, including non-accruals. Net charge-offs were 53 basis points during the quarter, at an increase of 2.6 million or 109% over the previous quarter. 73% of the net charge-offs during the quarter were related to loans, I discussed earlier. The banks consolidated watch-list ended the quarter at 72 million, up from 62 million at September 30th, and down from 86.4 million at year-end.

Taking a look at the banks independently, we continue to experience very strong credit metrics in the Louisiana, at IBERIABANK exclusively to the aircraft loans. At IBERIABANK, non-performing assets increased slightly from 1.7 million to 10 million or 26 basis points of total assets. We did recognize a slight uptick in the 30 to 60 day past dues in our indirect and consumer portfolios at quarter end.

It will be a fair statement to say that we are seeing more issues in the consumer portfolio, consistent with the trend of over leveraged consumers. We believe those issues are isolated and not widespread throughout our portfolios.

Well, it is early to call what the trend is. We are actively watching the portfolios for additional signs of deterioration. At Pulaski Bank and Trust non-performing assets, as of December 31st, increased 1.5 million to $36.7 million, compared to September 30th, and year end NPAs were 2.4% of total assets up from 2.3% at the end of the third quarter. With the non-performing assets, Pulaski had an increase in non-accrual loans of $1 million and an increase in OREO of 2.7 million, offset by a decrease in accruing loans greater than 90 days past due of 2.2 million.

I want to add a few select items within the portfolio that are worth covering. First I will start with a brief recap of the Pulaski residential builder portfolio, and to remind all on the call, the detail breakdown to the portfolio are available in the supplemental presentation on slide 12.

The Pulaski residential construction portfolio declined by $6.6 million or 19% to $28 million during the quarter. Our Louisiana residential construction portfolio is $168 million funded against total commitments of $218 million, our loans expressed (ph) in the market perspective is in Baton Rouge with 27% of committed loans. Past dues and non-accruals in this portfolio are currently $3.7 million or 1.7% of committed balances.

We have provided a few additional slides in our supplemental presentation this quarter to address various questions we have received on investors calls recently. Specifically, we have added the commercial loan portfolio composition by NACIS Code on slide 22. The commercial real-estate portfolio by market and zip code on slide 23 and identical information based on Commercial C&I or our non real estate commercial portfolio on slide 24.

One item we get a lot of questions about is our energy exposure. Again using NACIS code 2-11, 2-12 which is mining oil and gas extraction, 2-13 support activities for mining and our water transportation to quantify what counts as energy exposure. We calculate that our energy exposure is $94.2 million or about 2.5% 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 companies that we lend to in this sector remain very strong. It should have no issues weathering the lower price level for oil and gas. We have no past due credits in this portfolio.

Like other banks, we continue to monitor our credit very closely in these extraordinary times. We've recognized in an economic slowdown will eventually trickle its way into our economies in ways, such as the impact of lower oil prices from South Louisiana and slower tourism in New Orleans. It is impossible to know exactly what may or may not happen. I can tell you that IBERIABANK is consciously avoiding significant concentration, in these areas for this exact reason.

We are also proud of the fact that we have actively pulled back on lending over the past 18 months to industries we worried about. The good news is that today our loan portfolio continues to perform well. The Pulaski builder portfolio is compressing as expected and overall credit quality remains consistent with prior quarters.

I will now turn the call over to John for financials.

John R. Davis

Thanks Anthony. I will start with a brief summary of our financial results for the fourth quarter of 2008. For those of you that may have an interest, my discussion will occasionally refer to the supplemental PowerPoint presentation.

Beginning on slide 35; let's start with balance sheet changes. During the fourth quarter, average loans grew 64 million or 2%, investments in short-term interest earning assets decreased 43 million down 4% and mortgage loans held for sale declined 18 million or down 28%.

In aggregate, average earning assets remained fairly stable between quarters. The earning asset yield fell 11 basis points with commercial, consumer and mortgage loan yields all down 9 to 11 basis points. With the capital raises that I will talk about in a minute, we have a quite a bit of excess liquidity.

The near-term negative impact of the recent Fed rate decline was felt only late in the fourth quarter, because that's the point at which the rapid declines occurred. On the liability side of the equation average deposits decreased to $17 million, though period end deposits were up $61 million. It's important to note that average non-interest bearing deposits grew $41 million or 8% on a linked-quarter basis and up $47 million or 8% on a period-end basis.

Our short borrowings declined to a level of only $32 million. We continued to lower many deposit rates during the quarter. The average rate on interest-bearing deposits declined 31 basis points, while interest-bearing liabilities dropped points 26 basis points. This 26-basis point decline in liability costs exceeded the 11-basis point earning asset yield decline. So our spread improved 15 basis points. The non-interest deposit growth added to the margin as well, the net result being a 16-basis point improvement in the margin to 3.17%.

At year end 2008, we had $1.2 billion in cash and equivalents and in our investment portfolio. Our investment portfolio decreased $10 million or 1% between the end of the third and fourth quarters. The investment portfolio as a percentage of total assets dropped to 16%, versus 17% on September 30, and 18% the quarter before that. The portfolio's modified duration dropped from 3.2 years to 2.5 years. Unlike many in the industry, the unrealized loss in our investment portfolio improved during the quarter, from essentially breakeven at September 30th, to a $20 million unrealized gain at the end of 2008.

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, home loans, private-label CMOs, Level 3 assets, toxic sub-prime, Alt-A or second lien elements in our portfolio. We also don't believe bond premium amortization will be an issue for us as it was in 2003 and 2004, given we have very little paper purchase to premiums.

So balance sheet re-pricing information is provided on slide 40 and as shown on slide 41, we are modestly asset sensitive as a result of the excess cash generated by the deposit campaign, the ANB transaction, the recent capital raises and the rapidly declining interest rate.

Turning to the mortgage business, as shown on slide 42; fixed mortgage rates have fallen sharply and are below the bottom we reached in mid-2003. While conventional conforming rates have fallen, our jumbo mortgage rates have fallen less so, the result of which is that the jumbo mortgage spreads to conforming product remain extremely wide at around 136 basis points, as shown on slide 43.

Refi activity has accelerated considerably jumping from about 18% of originations last quarter to about 29% in the fourth quarter, about 75% in the last few weeks. We are the largest FHA lender in Arkansas, so the market shift out of sub-prime Alt-A and other products into FHA has been to our benefit. More than half of our production is FHA/VA.

Our mortgage production was fairly weak during the fourth quarter with the exception of near the end of the quarter. Mortgage production was down 16% on a linked-quarter basis. Loans sold were down 22% and gains on sale of loans were down 14%.

Spreads were very strong during the quarter but volumes were light. We provided some historical quarterly trending in mortgage revenues on slide 37. Originations have... have recently escalated very rapidly. As a result, the locked mortgage pipeline jumped form 61 million at the end of the third quarter to about 157 million last week.

So in summary, the mortgage business had a slow fourth quarter, but we are seeing incredible strength over the last 45 days or so, which may translate into favorable first quarter for the mortgage income. Revenues from the brokerage businesses were down about 200,000 on a linked-quarter basis were 17%. Activity in the residential and commercial title businesses was very slow in the fourth quarter. For your information, we provided historical quarterly title revenue trends on slide 38.

OREO count is up significantly versus year end, so we are hopeful for a meaningful revenue improvement over the next few months. During the fourth quarter, we sold a statue of the Roman Emperor, Hadrian for approximately $700,000. Partially offsetting that gain were some losses on the sale of other fixed assets. Some information on statue is provided on slide 39, if you have the interest to see it. The gains on the sales of these fixed assets show up in other income line of the income statement.

Total non-interest expense has decreased about $3 million on a linked-quarter basis. However, excluding the ANB merger and the branch closure charges incurred in the third quarter, non-interest expenses declined about 800,000 or about 2% on a linked-quarter basis.

On December 5th, we issued and sold 90 million in preferred stock to the U.S. treasury. On December 16th, we sold... we issued and sold 2,875,000 shares of common stock resulting in net proceeds of $109 million. With the timing and magnitude of the common raise, we are in the unique position of being able to redeem the TARP CPP funds if and when, we care to. That's not our current intent, but we have the flexibility to do so.

Given the strides in the financial markets and the banking sector in particular as of late, we believe maintaining flexibility and strength of paramount. With the capital raises, our Tier-1 leverage ratio jumped from 7.29% to 11.27%, up 398 basis points. Our total risk-based capital escalated from 1.07% to 15.69%, an increase of 462 basis points.

We pushed capital down to the Pulaski subsidiary, but not to IBERIABANK. Capital ratios for the consolidated entity and the subsidiaries are provided in the press release. Our Board declared a quarterly cash dividend of $0.34 per share, unchanged from last quarter. The yield was 3.67% based on yesterday's closing price.

As a result of trading anomalies in the swap market, we swapped out $70 million of our LIBOR-based trust preferred securities, fixing them for a weighted average period of 26.5 years had an all-in cost of 4.98% on a pre-tax basis. We did these swaps on a delay basis, so we kept the variable aspect until the end of 2009 and early 2010 to take advantage of the current low rate environment. Say what you will about the strategy but that is very cheap and stable capital.

So the bottom-line; we reported $0.58 of fully diluted EPS in the quarter compared to $0.68 in the third quarter. In summary, the credit issue cost us about $0.17 per share in the fourth quarter. The gains on the sale of fixed assets were a positive $0.03 to EPS and the cost of the newly raised equity was about $0.03. Excluding those three items, EPS would have been about $0.75.

We expect the dilutive impact of the equity raising activities will diminish the funds are deployed, but until then they will remain to drag the EPS. Bloomberg's reported estimate for the fourth quarter of 2008 was $0.70 per share. Slide seven shows significant out performance in our stock price relative to the bank indexes on the... throughout the year of 2008. And slide eight, compares our stock price performance relative to the major indexes over the last nine years.

While we have beaten nearly all of the indexes consistently over the last nine years, particularly last year, we have declined to some extent in tandem with the financial sector during 2009. Yesterday our stock price closed at $37.06 per share. This closing price equated to 91% of our December 31, book value per share of $40.53 which was up $0.57 per share or 1% above the September 30 figure and up 4% for the full year of 2008.

Our tangible book value per share climbed $4.31 to $24.20 per share, up 22% since September 30th. Yesterday's closing price equated to 150 of the tangible book.

In summary; we believe we continue to experience good loan and deposit growth. The recent capital raise drives a substantial capital strength to grow our franchise organically and through acquisitions or weather this downturn if the industry stride continues. The Pulaski builder portfolio continues to work its way down and has become fairly insignificant.

We have substantial liquidity such that we are ready to fund future loan growth which should drive future earnings. Our exposure to construction land development lending is extremely small. We are slightly asset sensitive and we operate in great but balanced markets.

I will suggest you to take a look at slide 49 and you will see our local economies general exhibit, low employment, modest housing prices, favorable housing supply-demand balance and potentially less consumer debt stress than many other markets in the country. This is not to say that we are immune from the national economic malice or that we're not concerned about credit, we are not immune and we are concerned. However, we believe we occupy a very favorable position relative to others in the industry.

I will now turn it over to Michael for his market commentary. Michael?

Michael J. Brown

Thanks John. Let me provide the market update as I usually do. The fourth quarter results are more interesting than the third in many respects.

During the quarter, despite the national slowdown, we saw continued good activity in our commercial portfolio. This was despite much tighter underwriting guidelines and increased pricing discipline. The good news is that we're seeing the market become more rational in both risk and return. Also in many cases, our competitors are shrinking with our regards to quality of the relationships and for the people if they're running from their portfolios.

These actions are rating us in a very selective in-process business development process. And let me indicate, we had a couple of credit issues throughout during the quarter and we believe these were unique situations that we now link to general deterioration. We are very pleased by the relationships we had in 2008 and have the balance in portfolios performing.

By being selective in our business development and underwriting process, plus in commercial portfolio we often experience now the ups and downs of the business cycle and have the staying power and liquidity to support their debt. This does not mean we will be in commercial loan problems that should minimize the number we have. There are number of slides and supplemental material to provide updates on our economic environment.

Although we're starting to see national downturn, we're hoping that a lot depends on housing that overall developments as well as price appreciation will reduce the impact on our communities. Specifically, even though deteriorating (ph) housing in our markets has and likely will be add to the downturn.

In each slide, the conclusion is the probability to try and minimize that effective price did not escalate to a level of many of the economically tough markets. With a lower rate increase there should be a lower decline in values. Finally I also want to remind you that our construction development expenditure is limited based on the historical desire to focus on that industry.

Now for the quarterly numbers; Loan growth for the quarter was 115million, which brought loan growth for 2008 to 314 million. The majority of this growth during the fourth quarter was in our C&I portfolio. Consumer loan growth was modest during the quarter which is not surprising, considering the time of the year, the broader economic issues and tighter underwriting. And the growth was after the sale of 30 million in credit cards of loans in the first quarter. Adjusting for that sale, the bank achieved double-digit growth in loans in both the quarter and for the full year.

Loan growth for the quarter came from a variety of our markets and was diversified. Leading markets for the quarter were Lafayette, Memphis and Baton Rouge. For the year, growth was also geographically diversified and came from Lafayette, Baton Rouge, and Memphis, Shreveport and New Orleans.

As we talked before, our growth is primarily from share movement, not from new growth for the market. This is activities held by recruiting efforts, which added extraordinary personnel in a number of markets during the year... apparently accounted individual's time growing the bank far more appealing than the one (ph).

Taking seasonal... excuse me, seasoned professionals and internal relationships from our competitors is relatively low-risk strategy in any business environment and particularly the one we are in now. We are still seeing high quality credit opportunities in a variety of industries. With less focused competition, we expect to pick-up some relationships that we have targeted for some time. We also expect to see some continued excellent recruiting opportunities in our existing markets and targeted new ones in 2009. From a deposit perspective, 2008 was an extraordinary year with deposit growth of over $500 million.

Although the acquisition of ANB contributed approximately $100 million net for total, the balance came from organic growth. The most exciting aspect of deposit growth was a mix over $100 million of deposit growth was from non-interest bearing deposits. Throughout the year, our markets are focused on generating a better deposit and next to enhance the market level profitability. As a part of this effort, we did see some run-off in deposits in several markets, particularly within the Pulaski franchise during the fourth quarter.

For the year, we saw good deposit growth in most markets like Shreveport Lafayette, Baton Rouge, and Little Rock leading the way. Throughout 2008, we've spend a lot of time and effort in working on our markets to enhance relative productivity and profitability. This has focused our market presence on enhancing earning asset yields, improving the deposit mix reducing credit risk and getting more from personnel expense. This is possibly the more focused effort on the part of our people on cross-selling products and services to both consumer and commercial clients. These efforts to improve market level profitability will continue obviously for 2009.

In summary, I feel good about the opportunities we are seeing to grow our markets with new clients and it proves all of our efforts are moving forward cautiously with the backdrop being the national slowdown.


Daryl G. Byrd

Michael, thank you. As mentioned earlier, we are embarrassed, disappointed and frankly aggravated relative to the fraud. However, we believe our annual charge-offs inclusive of this occurrence at 28 basis points of loans, our NPA at 83 basis points and our total past dues of 40 days including NPAs of 1.63%, still reflect extraordinarily favorable credit results. On balance, we believe we have an excellent quarter.

I will now open the call for questions.

Question-and-Answer Session


(operator instructions). And our first question comes from Matt Olney with Stephens Inc.

Matt Olney - Stephens Inc.

Hi, good morning, guys.

Daryl Byrd

Good morning, Matt, how are you?

Matt Olney - Stephens Inc.

Hey, I am well. Congratulations on the double-digit organic loan growth. Do you think this is possible or likely in 2009?

Daryl Byrd

Matt I will start and Michael will help me with this one. We've had great success from a recruiting perspective throughout our history but particularly last year, and we think we'll continue to have great success from a recruiting perspective. And we're excited about the types of relationships and clients that these folks are bringing to the company. And frankly we have a great team, and great success as Michael indicated across broad number of markets. Michael I am taking too much.

Michael Brown

Daryl pretty much sort of all map it. If you step into our profile and you take a look where the growth is coming from, it was from a combination of what I will define as organic markets existing core markets for the franchise, which we're seeing growth and it's coming from existing personnel as well as strategic recruits we've put into those market.

They basically are picking from other institutions, credit portfolios I would say the higher quality clients. These high quality clients are nervous about a lot of institutions and their ability to meet their financial needs on existing loans as well as future loans. As a result they are migrating to an institution they believe if they continue count on and so with predictable fashion.

You lay on top of that the new recruits we brought into with the decline of new markets not this being most typical example. We're seeing very, very good growth in that market, again a function of disruption in the Memphis marketplace, which we don't see coming to an end any time in the near future.

So we're cautiously optimistic about 2009, and you'll see some additional recruiting occur as Daryl alluded to and we'll really see like we're going to benefit from that as well. It's an interesting time of opportunity in an environment in which many people are sourcing...

Daryl Byrd

Matt, I want to make sure I very much underlined Michael's last comment. You will see us continue to recruit seasoned, very prudent (ph) relationship managers, into the New Year.

Matt Olney - Stephens Inc.

Okay, thank you. Thank you Daryl and moving over credit quality, on slide 21, I think there is a discussion about CRE portfolio, Pulaski Bank. There is some credit there, some past dues non-accruals that have been there before, they aren't new but are there any larger loans in that or that most of them about smaller type loans?

Daryl Byrd

I'll let Anthony answer that, but let me start real quick. When we're out... when we're presenting, we always get questions from people. And this slide is an attempt, it's been developing attempt on trying to add more granularity to the answer. And we're trying to give you as much detail as we can. We're trying to develop our system such that we can provide more and more detail, so that you understand the granularity of our portfolio. So hopefully this slide takes a pretty good shot at it.

We're going to continue to develop this when we've got more work to do and we know that, but we're trying to get you a lot of information in our portfolio so that you can really understand it. Anthony?

Anthony Restel

Yeah Matt, what I'll tell you is inside of our non-accrual bucket, it's a fairly... unfortunately it's a diverse number of loans that are in there across a couple of different segments. The largest credit that comes to mind, at least sort of thinking of this is just about 3 million bucks but it's not a big lumpy portfolio as of a lot of our housing and other things that we have been kind of been dealing with. And after the... through... whole of last year is in that number as well.

Daryl Byrd

Matt, what I would remind you is, we've always... we want to run a balanced company between consumer and commercial, I know it's somewhat of a consumer question. I do have information we want to give there. But from a commercial perspective, we are kind of small middle market lenders. We like companies that most people define as sort of a small business class. We're not your large corporate kind of lenders, that's not what we do. And so that portfolio tends to be more granular.

John Davis

Hey, Matt, it's John Davis; one other comment. The average size in the CRE portfolio is only 545,000. So, it's a fairly granular portfolio in that respect.

Matt Olney - Stephens Inc.

Okay. That's all very helpful. Last question guys; did you take any write-downs on OREO, or foreclosed assets in 4Q and can you remind us that of what your policy is as far as we are pricing some of those properties each quarter?

Daryl Byrd

Matt, we got Anthony to Elise Latimer, Director of Risk Management for us in the room. I'll let them kind to talk. I'd give you this sort of sets, and we are very fortunate the way we're positioned to as a company. You're not likely to see us trying to sell in bulk or in quantity OREO. We'd see ourselves as kind of grinding to sign out. We've got and as you know I'm looking at kind of total portfolio we've got a lot of houses, we have a few lots and very few subdivision... through subdivision loans in that portfolio that we've talked about so much.

We think we're well positioned to just kind of grant it out. We're not trying to take big discounts, we're trying to get out as close to possible we can and we had very good success with that. Elise, Anthony you want to add anything?

Anthony Restel

Yeah, hey Matt, just really quickly from an appraisal basis. Basically we were going to get everything priced annually, I would tell you. In terms of what we're doing and how, when it moves from the portfolio and OREO, it's really a diverse situation where every loan is individually looked at. In some case there are some small adjustments made when it's going down and in other cases like on lots, we've taken some pretty significant adjustments.

There is not an easy answer to the question. What I will tell you is obviously, we are taking bigger kind of movements down on just land-related issues. Houses are kind of moving down a little, I think we can move them out net of selling costs. That's a fluid situation, as the market deteriorate we're going to have to be look at times we haven't portrayed at the time. So unfortunately that's not an easy answer to the question.

Daryl Byrd

But we had... in 2008, we sold 34 houses out of Pulaski's OREO portfolio. So there's been significant sales out of that portfolio.

Michael Brown

Matt, this is Michael again; the most important thing that you see I think in this portfolio for Pulaski is that it's significantly smaller than it was when we first took over the institution. It's been driven down quite considerably through a conservative effort to reduce exposure. We got an early start here relative to our peers. At the same time, the other good part of that is the vast majority of it is housing as opposed to land or lots. Those are far more likely to sell closer to reasonable value than the land loans are at this particular juncture.

Matt Olney - Stephens Inc.

Okay, so it doesn't sound like you are doing write-downs as of 4Q or during 4Q. Is that right?

Michael Brown

Not sort of any significant charge.

Matt Olney - Stephens Inc.

Okay thank you.


Thank you. And our next question comes from Brian Hagler with Kennedy Capital. Please go ahead.

Daryl Byrd

Good morning, Brian

Brian Hagler - Kennedy Capital

Good morning. Just wanted to get a little more clarification on the... make sure I understand the 9.2 million commercial loan that's past due secured by four aircraft. I can't remember that if Anthony discussed that or who, but I think you said one plane is due to be sold in February. So I am assuming you have a contract on that?

Anthony Restel

Well that's correct.

Brian Hagler - Kennedy Capital

Okay and then the other three kind of timing still unknown at this point or is there... you said you are marketing them, so is there any initial interest, or you just don't really know the timing at this point?

Anthony Restel

The first plane is under contract, its firm contract with a deposit. And this plane hasn't been started (ph). It is to sell on February the 10th. The other three are actively being marketed by third party marketer. As you may or may not know that the aircraft market is soft as you would imagine because of the economic environment. We think we have three good aircrafts that have reasonable value, we have new jets 35a which are ideally suited for entry level aircraft. And right now we will be patient and take our time in terms of getting the best price. There has been interest in other three aircrafts and as everybody noted having the significant dollars in escrow to reduce the loan amount, certainly helps in terms of getting the satisfactory about resolution to this.

Brian Hagler - Kennedy Capital

Okay, I appreciate that color and than secondly Daryl...

Daryl Byrd

Brain, I will I want one point to that. We've got the situation that's kind of disappointed us that we've talked about a little bit today. In this case we have an individual, who I think is stepped up and added her word and done the right thing and we feel pretty good about the way we're positioned, on those airplanes.

Brian Hagler - Kennedy Capital

Okay, great. And then secondly on capital obviously, there you guys recently raised some capital and that was going to be used for continue to recruit lenders and grow organically which sounds like obviously its still happening and the other potential use of acquisition, and its just like to get kind of your update on kind of your outlook there. And would you be less willing to do a non-FDAC (ph) deal, just given kind of the weakness that we have seen across the sector?

Daryl Byrd

Yeah Brian, what I would say and start first. Obviously we had, we had very, very solid... we would have to say strong loan growth in this kind of environment. And we did well certainly commercially, but also from a consumer perspective. While we've said, we think we can't propose a chow for the kind of company that should have got in talk in that we're healthy and we're able to, I think, what was sort of intended with that and we do have a good loan growth.

We also have a very, very strong mortgage origination capability. And as John said, that group's pretty busy right now. So we feel good on those fronts that we'll have the kind of organic growth. We also, as I said favorably think that we're going to (ph) recruits and that's exciting.

From a bank acquisition perspective, John always tells me, don't say never. But the incentives are more inclined on the fail back side. I am very concerned about this market and I'll look at the companies and I'll look at their portfolios and just the kind of the amount of construction and land development, I'll see it just about any buy. And we haven't had much fun with that 130 million we talked about that we've worked down to 28 and actually don't know why I'd want to add to that if I didn't have to.

John Davis

Brian, this is John Davis. Let me just add one other thing and that is, I think our M&A pipeline is sufficiently full. We've got quite a few opportunities we're looking at in running this spectrum. But as Daryl described in this environment, it's partly driving that pipeline as you have a number of companies that are having significant difficulties of different kinds. And we're pretty opportunistic but we're also pretty patient and we're very selective in what we do.

Brian Hagler - Kennedy Capital

I appreciate it guys, thanks.

Daryl Byrd

Thank you.


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

David Bishop - Stifel Nicolaus & Company, Inc.

Hey, good morning gentleman. How are you doing?

John Davis

Good morning, Dave.

David Bishop - Stifel Nicolaus & Company, Inc.

Hey. It's also nice containment in terms of the deposit cost the past quarter relative to earning at the deals. What are you seeing out there in terms deposit pricing competition and was that a function of maybe some of the re-pricing of some of the deposit promos you ran mid year and what was the sort of the duration on those types of deposits related to this?

John Davis

Dave, again I'd remind everybody, we provided some re-pricing schedules in the second and third quarter, which we thought would give insight. And we think we're seeing... we've seen more kind of rational pricing in our markets. You get some outlast people that are stressed and you understand that and we watch that. But we're saying we think more rational pricing and we're fortunate the kind of markets we are in, typically haven't had a lot of the de novos over the years, so we're pretty happy with that.

Mike or John, John you want to add anything?

John Davis

I've said that we do provide the quarterly reprising schedule, so give it a sense of the volumes of what we have coming up and the rates at which, on the number of the assets, our major asset and liability categories.

Michael Brown

Yeah, Dave one thing I'll point out, as we go lower and lower in kind of absolute interest rate terms, and as there's more turmoil in the market, I think it's a fair statement that people become a little bit less sensitive to where are their earnings, 1% or 1.5, its about safety and soundness.

And so, we are thinking very careful about how we price, is where we price and what we're doing, hope that helps.

David Bishop - Stifel Nicolaus & Company, Inc.

Yeah. As you sort of look at the analogy out there I think you alluded to that there was some excess liquidity there at year-end from the offerings and talk there, could we view that as maybe some what of a tailwind for further margin expansion looking forward?

Daryl Byrd

What I was telling is, I think kind of what happened, if you take a look at the deposit reprising schedule, obviously that kind of tells the tale I think of where we're headed. The nice thing we've got now is asset deals, I do believe that's kind of bottomed out it can't go any lower than where it is unless we can got to negative interest rate. So I think that that's a positive for moving forward.

When you look at the bank from a liquidity standpoint, remember the banks are core founded, and we have no brokered money in the bank from a deposit perspective. So we've got a lot of alternatives in terms of how we might want a fund. So what our ... just again, if we think through the dynamics and then I'll talk about margins just because it's a little bit out our control in terms of what competitors and interest rates might do, but I continue to feel really good about how we're positioned.

Michael Brown

Hey, Dave I would add another one to that. Obviously, it's certainly a bit of a sellers market through credit. We understand that. And that's both, on a commercial and a consumer basis. And one kind of interesting fact is we're seeing is, is we've seen people who are no longer in the consumer business, we are actually seeing our consumer credit score is going up, which we see as a very favorable dynamic.

David Bishop - Stifel Nicolaus & Company, Inc.

Shifting gears a little bit, in sort of backing up, I think it's the complete commentary there but may be Anthony you addressed that the oil and gas exposure, could you just go over that real quick in terms of the exposure?

Anthony Restel

Yeah, Dave our direct exposure to oil and gas industry is, I want to say 95 million I believe is the number, but 2.5% of our consolidated portfolio which obviously is a relatively small number. If you kind of look in that, it's not concentrated in any particular segment of the oil and gas, kind of chain. We have got everything from drilling to service and supplying in there.

I will tell you that it is spread across in different markets. We have some companies up in three point area, we have some in south of Louisiana. The big issue for us that we are going to have to try to watch is kind of what the indirect exposure issues might be as oil and gas kind of works its way down.

Oil is just $42 a barrel today and so we have ... it's kind of rebounded a little bit from the 30s. But nevertheless, we should expect to see some level of impact as it kind of rolls through from an indirect exposure standpoint. Again, those are all hard to quantify. What I will tell you is right now things are continuing to go very well. In South Louisiana again, you can kind of look at unemployment, housing trends, and again we feel pretty good about it.

So with your particular question there is something you want to talk about the oil and gas...

David Bishop - Stifel Nicolaus & Company, Inc.

Yeah, I was just curious, I mean you had also alluded to the two in terms of some of the...there are some consumer delinquencies with it. Does that sort of having any pass through effect on that thus far or maybe you can comment on the rise in that?

Daryl Byrd

What I'll tell you, if you look at the end of last year, we saw the same rise at the end of last year.

David Bishop - Stifel Nicolaus & Company, Inc.


Daryl Byrd

And then it kind of went down. As you dig into it, no, it's not ... we can directly tie it back to oil and gas. Basically, when you look at our delinquencies and issues that people have and it's the typical consumer who has really build a leverage themselves, through many credit cards, loading up home equity etcetera, kind of just basic a little beyond their means. And I think that's the phenomenon that's happening everywhere in the country.

So I am hard pressed to say that our little bit of rise that we saw is directly tied to oil and gas at this point now. Obviously, we're watching it really for changes and obviously we'd let you know, but right now I think it's too early to call on that.

John Davis

And Dave, this is John Davis. On slide 22, 23, 24, we do provide some information we have not provided in the past regarding the composition of that commercial portfolio and the geographic distribution. So you get a pretty good sense of how that fits in.

David Bishop - Stifel Nicolaus & Company, Inc.

All right, thank you.


And the next question comes from the line of Jennifer Demba, SunTrust. Please go ahead.

Jennifer Demba - SunTrust Robinson Humphrey

Thank you. Good morning.

Daryl Byrd

Good morning, Jennifer, how are you?

Jennifer Demba - SunTrust Robinson Humphrey

Good. Is there... can you give us any sense of any areas of your commercial or commercial real estate portfolio that you're seeing any emerging stress, I am thinking or may something like retail center loans, etcetera?

Michael Brown

Hey Jennifer, it's Michael. We're really not seeing any areas of distress right now that what I would define as concentrated. And what we're seeing is random form sense and purposes. There is no general area of weakness to specifically retail. That's really not an area which to spend a tremendous amount of time focused on. So as a result we don't have a very large exposure to retail of any sort.

Anthony Restel

It's only about 3% of the commercial portfolio.

Jennifer Demba - SunTrust Robinson Humphrey

Right. Okay. And I know unemployment rates are generally lower in your footprint than the national average. But for your budgeting assumptions, where are you assuming unemployment peaks within your footprint?

Daryl Byrd

I'll take that but we don't necessarily budget an unemployment number.

Jennifer Demba - SunTrust Robinson Humphrey


Daryl Byrd

Obviously, our budget is something that we've never disclosed in terms where and what we've actually kind of budgeted for the year. What I'll tell you is, we have been cautiously conservative in terms of how we budgeted our performance of the portfolio in the next year. I can... I don't really don't ... I'd rather not get in to kind of what we've budgeted. We just haven't gone there.

Jennifer Demba - SunTrust Robinson Humphrey

Okay, I Understand. Thank you.


Thank you. Our next question comes from the line of Brett Villaume from FIG Partners. Please go ahead.

Brett Villaume - FIG Partners

Good morning.

Daryl Byrd

Good morning.

Brett Villaume - FIG Partners

I was wondering if you could tackle, what's the competitive landscape like in Memphis? Has it changed much in the last quarter? And what types of loans you are making there and what kind of loan growth you expect going-forward in that market?

Anthony Restel

We love it. Memphis has been great for us and we've got a terrific theme there (ph). I'll let Michael answer this from Memphis (ph) responsible work for recruiting the team and they've done an exceptional job for us.

Michael Brown

It's really laid out in summary form on slide, you may glance at 45. And if you step back we had an opportunity to bring in a group of relationship managers from a couple of different institutions. They had worked for close relationship between the team, long-term experience in the Memphis mark. They are very knowledgeable of whatever to find the right client base. Again, we spend a lot time when we recruit understanding the current mix of the individuals we are recruiting just to make sure it matches up with the kind of client base we want to go after.

The Memphis market, to your question about last quarter, still remains in a state of flux. The major players are still, I'll define struggling, to regain focus and that's very clear to the clients. And then again I go back to what I defined earlier in terms of why we're seeing opportunities that we are. Your typical client that Darryl defined earlier, is its really living out of their capital base. I mean that's how they make things work in their business.

And they want to make sure they have access to debt when they need it to meet operating needs or to purchase a facility for their business or to make an investment. And they intend to migrate towards a place where they feel they can get a predictable source of capital. We turned out to be that predictable source in Memphis and then in the other markets as well.

In terms of the type of activity there, they are seeing a lot has been eye (ph) oriented. We're not doing much CRE unless it's really related to our C&I clients in terms of market policy and that's really the make up of a business that they traditionally dealt with a group.

In terms of our expectations; when we put the team together middle of last year, actually that was more really into the third quarter. The team had succeeded those expectations and what's interesting is they exceeded them both in terms of loan growth with fundings of around 50 million commitments that includes a few ... include unfunded commitments worth around 72 million in credit.

What they also exceeded on the deposit side, we picked up around $30 million in deposits, reaching a non-interest versus interest pairing. We just really didn't expect to be that successful on the deposit side and the game that's really a function of again, flux in the marketplace.

So, couldn't be more pleased with Memphis. We will obviously use that as a, continue to use that as a model as we move into other markets and expect to have great success with it frankly.

Daryl Byrd

I will be able to cover what you're looking for.

Brett Villaume - FIG Partners

Okay. Yeah, thank you. And then, one final question was just if you could tell me what, I didn't it find in the press release, what the preferred equity capital now was at the end of the period? Do you have that number handy?

Michael Brown

Yeah, Brett. What I will remind you is remember that the preferred equity has got that two components; you've get the warrant element and you've got the preferred share themselves. So we ... the government did 90 million transactions for our side, the preferred shares were worth, just north of 87 million and the preferred share... and the warrants were worth, I want to say around 80, 82.

Daryl Byrd

And remember we were able within half the warrants, with the... after the price of equity.

Brett Villaume - FIG Partners

Okay. Thank you, very much.


There are no further questions in queue at this time, please continue.

Daryl Byrd

Okay everybody have a great afternoon today and we appreciate everybody joining us today and appreciate your confidence in our company.

Good day.


Thank you. Ladies and gentlemen that concludes our conference for today. Thank you for anticipation and for using AT&T Executive Teleconference. You may now disconnect.

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