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IBERIABANK Corporation (NASDAQ:IBKC)

Q2 2013 Earnings Conference Call

July 24, 2013 9:00 AM ET

Executives

John R. Davis - Senior EVP

Daryl G. Byrd - President and CEO

Anthony J. Restel - SVP, CFO and Treasurer

J. Randolph Bryan - EVP and CRO

Michael J. Brown - Vice Chairman and COO

Jefferson G. Parker - Vice Chairman, Managing Director of Brokerage, Trust, and Wealth Management

Robert Kottler - EVP, Director of Retail and Small Business

Analysts

Jennifer Demba - SunTrust Robinson Humphrey

Catherine Mealor - KBW

Emlen Harmon - Jefferies

Terry McEvoy - Oppenheimer

Christopher Marinac - FIG Partners

Bryce Rowe - Robert W. Baird

Operator

Ladies and gentlemen, welcome to the IBERIABANK Corporation Second Quarter Earnings Conference Call on the 24th of July, 2013. Throughout today's recorded presentation, all participants' will be in a listen-only mode. After the presentation, there will be the opportunity to ask questions. [Operator Instructions].

I will now hand the conference over to Mr. John Davis. Please go ahead sir.

John R. Davis

Good morning, and thanks for joining us today for the conference call. My name is John Davis, and joining me today is Daryl Byrd, our President and CEO; Michael Brown, Vice Chairman, responsible for our Markets; Jeff Parker, Vice Chairman and Managing Director of Brokerage, Trust, Wealth Management, and IBERIA Capital Partners; Anthony Restel, our Chief Financial Officer; and Randy Bryan, our Chief Risk Officer.

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. We also prepared a PowerPoint presentation, that maybe a useful tool for this morning's earnings discussion. The PowerPoint format will follow the prepared remarks associated with the call. The link to the PowerPoint presentation is available on our website in the IR section under Investor Presentations. A replay of this call will be available until midnight on May 3rd, by dialing 1-800-475-6701 with the same confirmation code as this current call, namely 297018.

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 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 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.

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

Daryl G. Byrd

John, thanks, and good morning everyone. We believe our operating results this quarter are consistent with the trajectory of the guidance we provided to the investment community in April, and reaffirm our expectations of $0.85 in EPS run rate in the fourth quarter of 2013. We continue to make excellent progress across the [improvement] initiatives we previously outlined; and I believe our reporting today provides transparency relative to these initiatives.

In the second quarter, we experienced somewhat anticipated onetime expense associated with these initiatives. However, our run rate for expense reduction continued to be executed upon. We have been very targeted and swift in executing the headcount reduction initiatives, and we have additional headcount reductions that will occur in the third quarter, associated with selected branch closures, while the appropriate disclosures have been made and these branches will be closed in the third quarter.

While never a perfect process, we believe addressing reduction [and force] issues in a fair and expedited manner, provides the target efficiencies, while minimizing any morale issues.

As the banking industry continues to evolve, client preferences are changing, and our delivery channels are changing accordingly. Helping in progressive organizations like our company constantly change. We believe our approach is consistent with our goal of continuing to provide a great place to work.

A number of key drivers of our business showed strong results in the second quarter. Our net interest margin was 339 basis points, up 16 basis points compared to the first quarter. We made good progress on the other initiatives, with continued strong growth in the non-interest bearing deposits, which grew 17% on an annualized basis, and are now 19% of total deposits.

Non-interest income was down for the quarter, as we did not have any gains on investment sales, and the rapid interest rate movements in the second quarter caused a negative derivative adjustment to our mortgage pipeline. Of all of our progress, I'm most pleased with our (inaudible).

In addition to our strong non-interest deposit growth, we continue to produce excellent high quality loan growth. In fact, we reported the strongest quarterly organic loan growth in our history.

Our (inaudible) loans grew at a 21% annualized growth and total loans annualized 14% growth after factoring in the continued reduction in FDIC covered loans. In particular, I am very pleased with the loan growth generated by consumer and small business lenders.

This quarter, legacy commercial loans grew $210 million, while legacy consumer and small business loans grew $179 million. This gives us excellent balance between commercial loans, which just (inaudible)tend to be a bit lumpy than consumer and small business loans, which tend to be more granular in nature. Also we are pleased with our growth of $62 million in Florida since March 31. We (inaudible) into our coming of historical lows, as real estate collateral values continue to improve. We are delighted that our Florida franchise is providing geographic diversity to our loan and deposit portfolios.

Our client account growth has been excellent. Specifically, for non-interest bearing deposit accounts. Slide 21 in our supplemental PowerPoint presentation highlights account growth for this deposit category in several of our larger markets. (Inaudible) to our top line and back office teams for their teamwork and efforts producing these results.

Randy Bryan will summarize our credit results in a few minutes. (Inaudible) we produced another boring quarter of stellar credit results. Net charge-offs were 5 basis points and fairly consistent over the last few years, so really not much to add there. Again, great work by our associates.

Finally, I do want to comment about several of our risk management and compliance initiatives, and the intersection of these efforts, with our acquisition opportunities. As we have mentioned previously over the last year, we have invested heavily in our risk management and compliance processes. We acquired (inaudible) for risk ratings, allowance methodology and stress testing.

We are in the final stages of implementing a new (inaudible) system. I am particularly excited about the (inaudible) system, as it will give us a very detailed and sophisticated look at the returns we are achieving in our markets and businesses.

From a compliance perspective, we have invested in making sure our community reinvestment stay right, and community outreach efforts, keep us in touch with our communities. By the way, this is one of our favorite (inaudible) efforts in our organization.

Throughout these initiatives we process (inaudible), we have used high quality consultants where appropriate, to ensure we have breadth and depth of leading-edge industry knowledge and best practices. We believe all of these initiatives have significantly advanced our preparation and ability to execute our continued growth strategies.

We continue to believe that industry headwinds will create opportunities for organizations like ours, who are prepared and able to take advantage of industry consolidation. John?

John R. Davis

Thanks Daryl. I will now briefly walk you through the second quarter results, compared to the first quarter beginning on slide 4. Our margin strengthened 16 basis points, as the earning asset yield increased 10 basis points and the cost of interest bearing liabilities declined 7 basis points. The earning asset yield improvement was partly a mix issue related to the $335 million in excess liquidity, that was earning very low yields and was liquidated to fund loan growth, which hurt much higher yields.

The investment portfolio yield and the loan yield net of the loss share receivable were essentially flat on a linked quarter basis. The decrease in the cost of liabilities was primarily the result of a drop in deposit rates we described in our last conference call, which declined five basis points and the higher FHLB debt we paid off at the end of last quarter.

The volume of average earning assets decreased $241 million or 2%, as the balance sheet compressed due to the reduction of our excess liquidity, partly offset by average loan and FDIC receivable growth of $89 million. We experienced tremendous loan growth on a period-end basis, which was up $308 million on a reported basis and $394 million, excluding the FDIC run-off. However, the growth was slower on an average basis.

Average non-interest bearing deposits climbed $72 million or 4%, while average interest bearing deposits were down $138 million or 2%. Period-end non-interest bearing deposits increased $84 million or 4%, while period end deposits, (inaudible) deposits declined $110 million or 5%. We are very pleased with the non-interest bearing growth, though much of the financial benefit of the growth in this category remains muted due to the low interest rate environment.

The higher margin outweighed the balance sheet, resulting in a tax equivalent net interest income increase of $3.5 million or 4%. Our net chargeoffs remain very low, equal to $1.1 million or an annualized 5 basis points on average loans. This net chargeoff level has been fairly consistent in each of the last six quarters.

We recorded a provision of $1.8 million compared to a negative provision of nearly $4 million in the first quarter. The provision this quarter was a result of exceptionally strong organic loan growth.

Slide five provides a summary of non-interest income items and trends; non-interest income decreased $2 million or 5% on a linked quarter basis, of which $2.4 million of the decline were security gains taken in the first quarter, but none in the second quarter.

Mortgage related income declined $1.2 million, due primarily to the spike in interest rates in the latter portion of the second quarter, caused a lower net valuation on mortgage derivatives and the mortgage loans held for sale. We hedged a portion of the locked pipeline but not all of it, and we had some [fallout] out of the pipeline.

Our mortgage origination business had very strong originations of $672 million, it was our third highest ever. Originations were up $126 million or 23% on a linked quarter basis, and up $81 million or 14% compared to last year. Refinancing accounted for only 31% of originations in the second quarter, and have since fallen to only 17%. We continue to run about half the industry average, and this suggests that we are likely to be much less dependent than our peers on refinancing, driving our mortgage production volume.

Mortgage loan sales volume were $684 million, that's up $68 million or 11% on a linked quarter basis, up $146 million or 27% compared to last year. The margin on sales has been fairly stable throughout the year, and then declined somewhat in June.

So in summary, we had significant growth in originations and thus provision sales volume was higher, but not to the level of originations. Margin compressed somewhat in the pipeline valuations (inaudible). As a result, mortgage revenues declined $1.2 million or 6% on a linked quarter basis. The locked pipeline volume declined from $281 million at the end of March, to $265 million at the end of June, and has since increased to $270 million on July 12. So the pipeline remains fairly robust, though the higher levels of interest rates have softened demand somewhat.

The title insurance business had a great quarter, with the number of closings up 8%, revenues up about $700,000 or 13% on a linked quarter basis, and profitability, more than doubled this quarter. Deposit service charge income continued to improve as well. The brokerage business experienced a 22% increase in revenues. IBERIA Wealth Advisors revenues were up 13%, while IBERIA Capital Partners' revenues were down 5% on a linked quarter basis. In aggregate, total tax equivalent revenues were up about $2 million or 1% on a linked quarter basis.

Non-interest expense trending is provided on the bottom half of slide 6. Total non-interest expenses decreased $27.5 million on a linked quarter basis, of which nearly all of the change was related to non-operating expenses. The [REA] impairment totaled $31.8 million and term loan bank debt extinguishment of $2.3 million last quarter were not repeated this quarter as expected.

Severance and professional services expenses were about $1.7 million higher on a linked quarter basis as we expected, and branch closure costs increased $4.6 million on a linked quarter basis, which was not expected. Excluding those non-operating items, non-interest expenses were fairly flat on a linked quarter basis. The upper right corner on slide 6 provides a breakout of the other more significant changes in expenses.

Mortgage commissions were up $1.8 million during the quarter, and that was due to higher production volume as we described earlier. The other expenses have been trending pretty much as expected.

Slide 7, provides a summary of non-GAAP reconciliation of income and EPS on a reported and operating basis. We reported $0.53 in GAAP EPS for the quarter. Significant factors affecting the second quarter on an after-tax basis were $0.11 per share in accelerated IA amortization expense that was expected. $0.07 in expected merger related severance termination costs and branch closure costs, and $0.09 per share in branch closure costs, that were not expected. Anthony will provide some details regarding the earnings enhancement initiative, the bond portfolio and (inaudible) sensitivity in general, and the FDIC portfolio.

Our capital ratios remain very strong. The leverage ratio at quarter end was 9.59% which increased 22 basis points during the quarter, due in part to the balance sheet compression. Our PCE ratio was 8.69%, our Tier-1 common ratio was a very strong 11.08%. No shares were purchased under the current share repurchase program during the quarter, so we had a little less than 47,000 shares remaining to be purchased under the current authorized program.

And I will now turn it over to Anthony for his comments. Anthony?

Anthony J. Restel

Thanks John. I am going to bounce around and cover a number of topics today. As always, I will be brief in my remarks. I will be happy to follow-up there in the Q&A portion of the call on items as needed.

The first item I want to cover is the performance of the FDIC-covered portfolio during the quarter. Overall, portfolio performance was in line with expectations we provided last quarter. Net income on the portfolio was 3%, $390,000 below our first quarter projections, as cash flow differed from original expectations. (inaudible) of variation has been significant, relative to the company's financial performance for the quarter.

From an asset perspective during the quarter, covered loans decreased $86 million, related loan loss reserves declined $17 million, and the indemnification asset declined $43 million. These declines were about $17 million in aggregate loans in the projections provided last quarter.

As a result of the lower income and higher loan availability, the portfolio of net yield was 5.11% during the quarter. (inaudible) slide deck presentation on slide 26, an updated projection for the next eight quarters. You will notice that we expect a slight uptick in the amortization in 3Q versus last quarter's forecast; but we continue to model expectations of improving credit.

As John indicated earlier, our net interest margin (inaudible) as expected to 3.39% during the quarter, up 16 basis points versus the first quarter. The improvement in margin was a result of aggressive deposit repricing during the quarter, FHLB debt extinguishment and greater earnings leverage associated with the deployment of excess liquidity in the loans.

During the second quarter of 2013, we have seen a significant steepening of the treasury yield curve. In general, a steeper yield curve has been beneficial to banks, and IBERIABANK is no exception. Additional yield now available between the two and 10-year point from the treasury curve, should provide additional income opportunities in several areas.

First, cash flow being reinvested into our securities portfolio is earning approximately an additional 1% in our (inaudible) team. The current market environment allows us to remain conservative with our reinvestment strategy, while maintaining and potentially improving the yield on the securities portfolio.

Second, the steeper curve should provide additional yields in our originations of fixed rate loans. In the second quarter, IBERIABANK coverage originated over $800 million in loan balances, with approximately 50% of the balance having a fixed rate. I expect that the markets will begin to incorporate these higher treasury yields into new loan opportunities for the coming quarters, which should provide higher margins.

(inaudible) steeper curve has not impacted this deposit pricing. I do not expect a material shift in funding costs, as the short end of the yield curve remained anchored by the cognitive policies of the FOMC. I should note that at this time, there are a few uncertain impacts, a steeper yield curve may have on our non-banking entities.

Revenues from our mortgage title investment banking companies could be affected by our steeper curve. However, it is still too early to determine the degree of impact (inaudible).

During the quarter, we saw a $48 million drop in the unrealized gain on the investment portfolio, to an unrealized loss of $8 million at quarter end, given the movement in market rates I just discussed. The modified duration of the portfolio extended 10 months to 3.9 years.

(Inaudible) the impact of additional potential increases in rates, and the impact of an instantaneous parallel (inaudible) shift, in the rate of 1% of cost occurred, the modified duration would extend for an additional four months, and the unrealized loss would increase to approximately $91 million.

Switching over to our earnings enhancement initiatives, as we announced last quarter. I am pleased to announced that we are on schedule to achieve the targeted run rate pre-tax enhancement, $21 million by the end of the fourth quarter.

(inaudible) we have provided appropriate details in the supplemental PowerPoint, where our progress can be tracked. We did experience (inaudible) in anticipated branch (inaudible), valuation for a number of transactions, and we did have a few additional branches to the (inaudible).

We have (inaudible) to accelerate more costs into the second quarter, and now project the remaining cost to implement initiatives, not to exceed $1 million, all of which (inaudible) in the third quarter. Most of the branch closings will occur in the week of august 25th, and therefore the impact of the branch closings will be fully factored into the fourth quarter.

Although we have increased the branch closures by a few, they are not adjusting (inaudible) $21 million target of incremental savings, mainly offset to new expenses. The largest of which will be positioned in the bank for a successful submission of the bank's Dodd Frank's act stress testing, through all regulators in early 2014. Consistent with the last several quarters, we continue to evaluate new opportunities or other initiatives that could enhance the earnings in the company in future periods.

From an expectation standpoint, you will see significant improvement from the enacted initiatives take hold in the third quarter, as revenues continue to grow and expenses decline. In fact, we began to see the impact of the initiatives we detailed under the second quarter, where we achieved a GAAP EPS run rate of $0.27 per month.

Switching over to regulatory related items; the new capital roles were recently finalized and we are evaluating the impact on IBKC. Although earlier in our review, we do not see any significant issues that will materially change our capital ratios. Some of the larger proposed changes that would have impacted IBERIABANK, such as the trust phaseout in the investment portfolio, (inaudible), inclusion in capital will address favorably from an IBERIABANK standpoint in the final rule.

We have enhanced a number of times recently about the Dodd Frank Act stress testing in our cost to comply with this rule. The short answer, is the bank began preparations earlier this year, and we will spend approximately $1 million and incurred about 6,000 internal man hours to ensure we are able to successfully deliver a satisfactory stress test in March, to our regulators.

The bulk of the $1 million in expense will be incurred in the last half of this year, and primarily relates to excellence of the fixed rate model creation, and model validation required to appropriately complete the stress test. These costs are included in the forecast that's supported in the earnings guidance we have in place.

One last thing in the income statement in the second quarter that was worthy of a brief mention; the 22% effective income tax rate for the quarter was driven by the $7 million in charges associated with earnings enhancement initiatives. Our expected tax rate should return to those (inaudible) percentage level for the remainder of the year, assuming other non-recurring adjustments do not occur.

Lastly, I want to briefly comment with the existing values relative to the fourth quarter. During the fourth quarter, we announced the projected GAAP EPS of $0.85 for the fourth quarter, with a net interest margin in the range of $3.30 to $3.35. As Daryl indicated in the comment earlier, we are confirming those expectations.

Now I will turn the call over to Randy.

J. Randolph Bryan

Thanks Anthony and good morning everyone. IBERIABANK had another strong quarter from an asset quality standpoint, maintaining our consistent level of performance. We continue to make excellent progress in working through the FDIC covered assets, as we approach the four year mark on our first deal with (inaudible) Capital South. We are seeing even some of the most challenged areas and property types, real estate prices stabilizing or increasing. Our BTS, SAP, OREO, collections teams are working together with our partners in finance and accounting, are doing a great job of resolving these assets and maximizing value.

Slide 13 of the deck shows the steady progress we are making. NPAs in the FDIC book, which is on average nearly 11% per quarter over the past year. NPAs in the acquired impaired [SST 3-3] book has dropped nearly 22% in the past three quarters, since our last acquisition came online.

Flipping to page 14 of the deck, we will walk you through some of the legacy bank asset quality metrics, excluding both the FDIC covered loan portfolios, as well as the acquired and impaired loan portfolios.

For the quarter, NPAs increased $3.6 million and $99.6 million and represented 86 basis points of assets. These levels are within 2, 1 and 3 basis points respectively a year ago, year end and last quarter results. The change in NPAs could be attributed to a $4.9 million increase in non-accrual loans, and offset in part by decreases in OREO and accruing loans bigger than 90 days past due.

The increase in non-accruals is driven primarily by a large -- (inaudible) relationship of slightly over $10 million, in which we had an abundance of collateral, and do not expect to incur any loss.

Net charge-offs in the quarter were 5 basis points. Again, from a consistency standpoint, this compares to the 6 basis points we incurred last quarter and the 7 basis points we have averaged over the past six quarters. At year end, total classified loans declined 14% from $30 million to $183 million.

As noted earlier, we recorded a provision of $148 million in the quarter. I will discuss changes to our ACL methodology in a moment. At quarter end, the allowance for credit losses for the legacy book was (inaudible) basis points compared to 99 basis points last quarter. Net yields as a percentage of non-performing assets stood at 77.2%, versus 77.3% in the first quarter.

Turning to page 15, (inaudible) from the legacy books in the entire portfolio, including the covering of acquired parent loans, was a story that's very much consistent. During the quarter, non-accruals declined 11.5%, OREO decreased 1.9% with the resulting 9.5% decrease in overall NPA, consistent with the 10% decrease we experienced in the first quarter.

We continued to experience high consistent turnover in the OREO book, and currently have nearly one-third of the inventory under contract to be liquidated and price to appraisal levels, slightly higher than what we have experienced in recent years. Loans past due, 30 to 90 days increased $149 million.

As we indicated in our last quarter's call, we have developed a new allowance for credit loss methodology and system, in line with large bank requirements. This new methodology will provide significantly more granularity, and better enable us to manage the portfolio. As the portfolio grows and changes over time, we will be able to utilize enhanced possibility of defaults, and whilst given default measures across more than 1100 loan categories.

In addition, this methodology is a significant (inaudible) to our D-Frank Stress testing program. Given this development of the (inaudible) in late 2012 and early 2013, with an early 2013 implementation, and given that's a significant (inaudible) and reduces the effort and expense we will incur for the balance of 2013 in stress testing development.

To implement this new methodology within the quarter, and as far as that transition, we established a reserve for unfunded lending commitments or RULC, affected in June 2013. Since reserve was shifted from (inaudible) assets to the other side of the balance sheet, is now part of the other liabilities accounts.

Just as a case in balance sheet geography, the resulting impact was to move $9.9 million to this reserve for unfunded from the allowance. At quarter-end, the RULC stood at $10.3 million, reflecting that 9.9 plus another 400,000 added in the quarter due to loan growth. You will see we have updated page five and six in the release to this change.

In closing, the second quarter demonstrated our consistent strong asset quality, visible loan growth and continued demand in the risk management (inaudible).

Now I am going to turn the call over to Michael. Michael?

Michael J. Brown

Thanks Randy. In the first quarter conference call, I walked you through our various efforts to determine market level performance. As we noted, our intent was to improve performance by making the markets more efficient. From an expense perspective, it did not impact our efforts to expand revenues. A lot of progress was made during the second quarter relative to this effort.

Let me start with the results from the expense initiative itself. During the second quarter, we closed two limited service locations in one branch. As Anthony noted, we also decided to close another 10 branches, not that these will close during the third quarter, towards the end of August. While considering the closure of these branches, the run rate for retail staffing costs has declined by 7% from the (inaudible) the end of the first quarter.

It is worth noting the including of the third quarter closures, the bank will have closed 25 branches since the fourth quarter of last year. In addition to facility closures and other retail efficiencies, the bank also (inaudible) market level staffing, (inaudible) the number of positions outside retail banking. These eliminations were just during the second quarter. Although clearly painful, the communication of these decisions was handled well by the personnel involved at the market level, and within human resources, handling this process well is key (inaudible) momentum placed to generate revenue growth.

From a revenue perspective, we saw great progress during the fully consolidated fund growth on both sides of the balance sheet, and we will begin with loans. Funded loans ended the quarter $8.9 billion, which, including the impact of the FDIC portfolio, was up a strong $308 million from the end of the first quarter. Excluding the effect of the FDIC portfolio, funded loans increased a remarkable $394 million or an annualized level of 21%.

As seen on slide 18, and as Daryl mentioned, this is the highest level of loan growth our company has ever achieved. Originations, which also includes renewals, totaled $1.2 billion for the second quarter, with $808 million in loan balances. That's surprising, considering direction of interest rates, the fixed floating mix on originations during the quarter was 50-50. (Inaudible) improvement from 54.46 in the first quarter. The average coupon for originations was 384, with an average term of 6.9 years. As in previous quarters, the longer term on consumer production, also the shorter term on commercial loans.

The average term loan, overall originations was down a year however from the first quarter. Although competitively, that we are seeing many other banks extend fixed rates to our balance sheet lending, which we are trying to limit, and it is worth emphasizing that despite a significant growth, we are losing many (inaudible) for risk and return considerations. In other words, we do not feel that we are sacrificing risk of return to gain growth that we were seeing.

The one (inaudible) that was truly remarkable, came from a number of markets and a number of businesses. From a business perspective, we saw growth from our commercial business banking, and consumer clients. And as is outlined in slide 17, (inaudible) in all states, including Florida, where we have recently seen a good pick up in lending activity. Florida contributed to $62 million of net growth during the quarter, with all markets participating.

Overall commercial growth during the quarter was $210 million, with funded net growth the highest in Houston, Birmingham, Mobile, Baton Rouge, Naples and Memphis. It is worth noting that this single industry growth will (inaudible) during the quarter, in fact we saw only a modest increase in fundings within our energy portfolio, and the banks level of funds syndication declined quarter versus quarter.

Finally, it is also worth noting the commercial additions (inaudible) to 55% of funded loan growth, which shows much greater balance in the stock production levels.

From a business banking perspective, we saw funded loan growth of $61 million during the second quarter, with the primary driver being our Louisiana franchise, where we are furthest along relative to our business banking investment.

Business banking loan growth equated to an annualized percentage of 46%. Business banking loan originations, which carried a 90 basis point premium to our commercial originations, have an average term of 5.9 years.

Consumer loan growth, which includes traditional home equity, indirect order and credit cards and mortgage increased $118 million during the quarter. This equates to an annualized growth rate of 24%. As one would expect, because the home equity and mortgage component within consumer production, this part of the portfolio (inaudible).

On the deposit side of the balance sheet, we saw a decline in overall deposits, with runoff in interest bearing deposits exceeding growth in non-interest bearing. Despite the decline in overall deposits, we continue to be very pleased with the increase in non-interest bearing, which had annualized growth during the quarter of 17%. Non-interest bearing deposits represented 19% of overall deposits, which was effectively unchanged from the end of the first quarter.

As discussed in the first quarter call, we are continuing to pursue new depository clients, and in fact saw an increasing level of transaction accounts during the second quarter. This ties directly into our efforts to expand non-interest bearing deposits have shown for example, in key markets in slide 21. During the quarter, we opened approximately 9,000 new accounts, with net growth of 1,250 accounts. Although this level of growth was down from the first quarter due to the lower level of promotions, the increase in accounts was up materially from the same quarter of 2012.

Increased level of accounts, combined with more treasury management sales activity was reflected in a 10% growth year-over-year in service charges in the first six months of the year. A significant improvement in key product offerings, we expect to see charges in management fee income become a more significant contributor to our bottom line in the future.

In conclusion, I feel that there has been a lot of progress made in the past 90 days in our two core goals, lowering expenses and growing revenues. Clearly, we have more work to do, but I feel that the second quarter will be a pivotal one, (inaudible) the markets back to previous levels of profitability. Jeff?

Jefferson G. Parker

Thanks Michael and good morning. The brokerage trust in wealth management has showed steady results for the second quarter. I call your attention to slide 25 in our PowerPoint presentation, it highlights the revenues of IBERIA Capital Partners and IBERIA Wealth Advisors. These combined top line numbers were the second highest in the brief history of these businesses, and the results were in line with our budgeted expectations.

IBERIA Financial Services had a very solid second quarter. Let's look at the business units in detail. IBERIA Wealth Advisors, our cost and asset management business, grew assets under management to just under $1.1 billion at the end of the quarter, an increase of 1% from Q1, and an increase of 22% from the second quarter of 2012. Revenue was up 13% on a linked quarter basis, and was up 28% year-over-year.

Louisiana's year-over-year revenue was up 73% and that team again deserves very special recognition. We are expecting Arkansas and Florida to make a greater contribution in the second half of 2013.

IBERIA Capital Partner's revenues continued to be driven by investment banking activity. Investment banking participated in nine transactions in 2013 through the second quarter, compared to 10 in all 2012, and two in all 2011. ICP had our third best quarter, since we launched our broker-dealer in the fourth quarter of 2010. Revenues were down 5% on a linked quarter basis. We were providing research coverage on 72 companies at the end of the quarter, down from 68 at the end of the first quarter, and 62 at the end of the fourth quarter. We are continuing to add coverage of additional energy companies, have a goal of providing research on 100 companies by year end.

Recently, we have added to our institutional sales group, and just last week, we added a senior oilfield services analyst.

Let's look at IBERIA Financial Services. IBERIA Financial Services, the bank's branch brokerage business and revenue is up 22% on a linked quarter basis, and up 6% year-over-year. The rebound was driven by conversions of increased referral activity, which comes through (inaudible) from the branches. Arkansas (inaudible) increasing revenues 37% and Louisiana had success as well, growing 23% on a linked quarter basis.

Overall, and in summary, we continue to develop these three businesses, and the combined results have recently been added to the bank profitability. Our focus will continue to be top line oriented, but we will also be very focused on bottom line profitability, in line with the comments that Daryl and others have made regarding our corporate initiatives.

At this point, I will turn it back to Daryl Byrd.

Daryl G. Byrd

Jeff, thanks. We believe the progress made this quarter, positioned the organization to meet, and hopefully exceed expectations. Our client growth across multiple markets and businesses is exceptional. Also our strong capital strength and credit quality allows us the unique flexibility.

We believe our investments position our relation for a strong finish to the year, and we will continue to [pay off] in future years. I want to again, thank our associates for the dedication, hardwork and commitment to our organization, and our communities; and we also appreciate the support of our shareholders.

At this point, I will open the call for questions. Darien?

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions]. Thank you. The first question comes from Jennifer Demba from SunTrust Robinson Humphrey. Please go ahead with your question.

Jennifer Demba - SunTrust Robinson Humphrey

Thank you. Good morning. My question is about asset quality, obviously has been very strong for a long time, particularly last year and a half. Just wondering, given your (inaudible) loan loss reserves, (inaudible) 1%, how comfortable are you taking that down much further from here?

Daryl G. Byrd

Jennifer, good morning. I will let Randy kind of cover this one, Anthony maybe want to jump in as well. We are pretty proud of our credit results. We have been very consistent, and I think a very low level of chargeoffs, what is now frankly a fairly long time frame. As always, we are going to consider our results adequate and appropriate, and kind of to the circumstances and to the quality of our credit. And I think you will probably understand, this is a bit of a tug of war between the kind of the county profession and the regulatory side, that we have to balance and deal with. And I think we will do it appropriately. Randy, your thoughts?

J. Randolph Bryan

I agree with you Daryl, I think as Daryl said, we worked hard to appropriately strike, I think given the historical performance in our portfolio and the consistency of the (inaudible) we are putting on the portfolio today, with chargeoffs, etcetera, I think we are very comfortable with where we are. We expect to see a dramatic change one way or the other, in terms of that aggregate level of reserves.

Anthony J. Restel

I would just echo Randy's thoughts that we -- as we move into a range of the year, the next year, barring a significant shift in credit, the reserve levels should remain (inaudible). Of course, ranged by all the groundwork that would be my expectations.

Jennifer Demba - SunTrust Robinson Humphrey

Thank you.

Operator

Thank you. The next question comes from Catherine Mealor from KBW. Please go ahead with your question.

Catherine Mealor - KBW

Good morning everyone.

Daryl G. Byrd

Good morning Catherine.

Catherine Mealor - KBW

First, I just wanted to confirm that the $0.85 number that you have been guiding to the fourth quarter, is comparable to a $0.69 number for this quarter, so it includes the IA expense?

Anthony J. Restel

Catherine, it's $0.85 GAAP reported number, which would include all (inaudible). So it's a bottom line reported GAAP -- it should be compared to the $0.53 number.

Daryl G. Byrd

Excluding any merger related calls, so --

Anthony J. Restel

Excluding obviously, except we were to be so lucky to acquire something which (inaudible) question later on about that. But given any noise related to that, it should be $0.85 from a GAAP perspective.

John R. Davis

And at $0.27 you talked about in your (inaudible), it was a GAAP number for JV, correct?

Anthony J. Restel

Yeah that's correct.

Catherine Mealor - KBW

Okay, got it. So that's comparable to a $0.69 number then from this quarter, not the $0.63? That you had some efficiency improvement this quarter?

John R. Davis

You're right. If you're adding back the non-operating, obviously we don't expect to have really any in the fourth quarter. So yes, it would be comparable to the $0.69.

Catherine Mealor - KBW

Okay perfect. And then want to follow-up on Jenny's question, but how should we think about that $0.85 and what level of provisioning we could see within that number? I am just trying to get a sense as to how much of the improvement from this quarter to fourth quarter could come from better credit or loan provision, versus better core earnings?

Jefferson G. Parker

We have consistently provided for loan growth, and I think we would certainly continue to do that. But also, as we stated, and as Randy talked about and I talked about, we have a pretty low level of charge-offs and a very solid credit portfolio, which we expect to continue. Obviously the caveat is always, we can get to -- we have a commercial business, that could be lumpy and we can get surprises there. But at this point, we are certainly not expecting any, but obviously you never know, but we feel pretty solid. Our results have been very-very consistent for a long time now, so we feel pretty good about that.

Daryl G. Byrd

Anthony, or Randy, any commentary there?

Anthony J. Restel

Let me -- Catherine, I will tell you that from modeling perspective, we are expecting the reserve to kind of go up over the next two quarters, so we are not relying upon reserve release to or bring in the reserve level as a percentage of the portfolio to meet to $0.85. So if we continue to have the growth that we have and credit remaining the same, I am telling you, I would expect the reserve level to go up. We do have that kind of built in, the provision expense level go up there in the quarter, and we do have that model built into the numbers.

Catherine Mealor - KBW

All right perfect. Very helpful. Thank you.

Daryl G. Byrd

Obviously Catherine, there is a lot of factors that go into that, while that's creating a view that it's not something we expect to have -- see a lot of reserves (inaudible).

John R. Davis

And one other thing Catherine, when you always pull back the reserve for the quarter, right, we had a reserve release tied to the OMNI (inaudible) their portfolios. Guessing the improvement in performance, as a couple of (inaudible). And so that freed up about $1.6 billion there in the quarter, so that's kind of a favorable number to the quarter. And you know excluding that number, the general provision was about $2.7 billion, or $2.8 billion, and to just give you some stats of kind of what that would look like, excluding that (inaudible).

Catherine Mealor - KBW

Thank you.

Operator

Thank you. The next question comes from Emlen Harmon from Jefferies. Please go ahead with your question.

Emlen Harmon - Jefferies

Good morning guys.

Daryl G. Byrd

Good morning Emlen.

Emlen Harmon - Jefferies

Just on the commercial pipeline, it looks like it was quite a pretty strong quarter for loan growth this quarter. It sounds like things are looking good next quarter as well. I think in Michael's comments, you kind of talked broadly to the improvement across markets and product types. I guess, what I am trying to get at is, how much of that loan growth is being driven by this kind of a general economic lift across the foot print, versus kind of the investments that you guys have been making in kind of personnel and the infrastructure there?

Daryl G. Byrd

I am going to start, and I will let Michael to kind of jump in, and the first thing I'd say, I want to congratulate Michael's teams in (inaudible) submarkets for really excellent results, and they are doing a great job for us, we have some great teams in place that are performing extremely well, and particularly pleased with the sort of growth that you saw during the quarter.

I'd also comment that's kind of a new piece of the mix and that's one that we've invested heavily in, so I want to point it out, and I did in my remarks, is our consumer, small business, business banking efforts, we had a very good quarter, and I certainly expect that to continue. I want to thank Bob Kottler and his teams for what they produce later, and it's giving us a balance that we like, I made the comment -- on the commercial side, we have always been very good at that, but it's a bit more lumpy, whereas on the consumer side, in the small business side, a little more granular, and we really like the diversity and the mix that that provides us.

Michael, do you want to talk specifically about the kind of pipeline?

Michael J. Brown

Yeah, would be happy to. To your question, I mean, to think about our company, we've been making investments in the markets, in terms of people specifically around commercial for a number of years. We added people specifically in the broader markets in the last 12 months. We added a team in Houston in the last 12 months. All of the initial investments, plus the ones that is described here are contributing to the pipeline, and contributing to the (inaudible) activity. Again, I don't want to be talking about at historic, we talked about that commercially, but I do want to emphasize how important it is for us to be seeing a return on our investment with retail, since the business banking grew.

We are seeing good productivity and good production from (inaudible), that Daryl touched upon earlier about the balances what we are striving for, because early commercial lumpy and has a currently cyclical (inaudible) and just like, so that's more of a granular portfolio to sort of balance out.

In terms of the contribution from the improving market, we are seeing developments at the market level, which are positive to the Florida contribution. Earlier, we would have added -- to those groups, if we didn't expect for economic improvements at current, which we are seeing, values, what Randy was talking about from a (inaudible) perspective of stabilizing or recovering, which is giving us some comfort in terms of lending into that space.

So it's a contribution of factors, if that was (inaudible). I would say that the principle contributor still is the investment we have been making in people over the past few years, but we are also seeing a (inaudible) contributors starting to vote, which is economic improvement, build a little bit more confidence on the part of businesses to spend money in (inaudible) revenues driving working capital on.

And then thirdly the consumer side of spending again, which is very good.

Anthony J. Restel

Michael, truly a very balanced approach. We can see a fair share. We see some markets improving, and we see businesses that are coming online for us. So that's what I kind of -- make up the great mix.

Michael J. Brown

(inaudible).

Emlen Harmon - Jefferies

Got it. Thanks. Since Anthony prompted it, would you give us kind of your take on the deal outlooks, kind of what you are hearing from potential (inaudible)? Did they split the volume within (inaudible)?

Anthony J. Restel

I am going to let John jump in this, but I think we have seen more incoming, and with the comments I made -- there are still some pretty significant headwinds out there for a lot of people. So a bit of a difficult operating environment, different issues people are challenged with. We think we are very well positioned. We have talked about some of the investments we have made from a risk management perspective. We are very proud of those, and I think it positions us well. So I feel pretty good about it. John?

John R. Davis

Well I would just say, we have seen probably more activity picking up on the inbound calling. We have had more outbound calling as well. Just given what happened in the industry; and the opportunities that exist there, but -- if you move a bit about, I think want to see people being realistic in their expectations, and I think as Daryl described I think they are forward-looking. They are looking out to see what's happening in the industry, and how the industry is changing and how the partnering with somebody is not the solution. So it's -- I think a very good environment for them.

Emlen Harmon - Jefferies

Great. Well thanks for taking the questions guys, appreciate it.

Operator

Thank you. The next question comes from Terry McEvoy from Oppenheimer. Please go ahead with your question.

Terry McEvoy - Oppenheimer

Thanks good morning. I was wondering if you could extend upon the small business loan growth we had, maybe by market, with housing related borrowers and what would be the outlook for the second half of the year in that business?

Michael J. Brown

The question is that --

Daryl G. Byrd

He is asking where the small business growth is coming from? Is it housing related, or --?

Michael J. Brown

The small businesses I mentioned is not about sort of -- (inaudible). We are seeing more of the activity in our -- that defines our legacy markets, which would be (inaudible), because we are further along relative to that small business investment. If not housing related, we are not focused on the housing market, we -- that's an a area that we have not been involved in, since we joined the company from (inaudible). It's not an area that we focus on at all. So it was generally coming from a broad range of businesses as well as from geography. Bob?

Robert Kottler

Yeah, I would say that we're still feeling fair amount of owner-occupied lending. We'd like to give more lines of credit in small term loans and improve that mix, which we are starting to see, I think that's in line with what the industry sees. But generally, what we are seeing is -- we have hired a fair amount of new bankers, and as those new bankers generally come from larger banks, come online, we are seeing more productivity. So I think it's fairly broad based, both from our investment, our bankers and from the product sites, and across the pretty broad range of industry (inaudible) concentrated.

Daryl G. Byrd

Bob, you would agree. I mean with 180-ish kind of branches and historically we have done very little small business lending across those branches. So if you think about the investment we have made in the teams to be able to provide the appropriate kind of support underwriting, except for the small business, business [mapping]. We've got a huge amount of leverage by -- as we [start making] small business lines in those branches. You can just think what a small amount of small business loans in each of those branches would equate to in terms of the volume, and I think you can see the volumes can grow pretty rapidly. (inaudible).

Robert Kottler

And one of the things we have done is, we have continued to hire and replace new branch managers -- with branch managers, our focus on to be able to call in and take care of small businesses. And then we provided then with fair amount of sales and product training to be able to support them, in an addition to what we have done in the back office, as well as new product development. So the real goal is to have a very solid mix of what the branches do, and what our bankers do.

Michael J. Brown

Bob, it's not all that granular, it has significantly higher yield than our commercial portfolio typically?

Robert Kottler

It was about 90 basis point that Michael said on the quarter, but one of the thing, as we get -- clearly the more granular and number of smaller loans we do in the portfolio, the better fees and yields we get on those loans. So the more we can have, our bankers and our branches produce, the more impact we will see from that.

Daryl G. Byrd

Clearly, we're excited about the operating leverage provided here.

Terry McEvoy - Oppenheimer

Then just a follow-up. Non-covered loan yields were down 4 basis points from the second quarter. We will get some of the data on slide 9 and look at it during the third and fourth quarter. Would you expect some stability in the non-covered loan yield or continued compression to the same degree we saw in Q2?

Daryl Byrd

Anthony?

Anthony J. Restel

Yeah. We are going to get -- we are going to see a little bit more compression as I alluded to in kind of my commentary. We continue to model credit improvement and so that improvement in credit cash flow is a -- call it symmetrical with the amortization tab. So that's going to create a little bit more headwind from an amortization standpoint. So I think we have given you the net income kind of number as we try to think -- make it easier to take a look at, where we think that portfolio is going in the supplemental deck.

But generally speaking, just keep in mind that our income on that portfolio is where we stand, that come through the accretion numbers and really the big barrier to get to the -- your loan balance. So it's a purely, I hate to say it, our income is kind of well defined and so, (inaudible) where the balance on the portfolio will drive what the yield is, which is why we are trying to keep equal focus on the income perspective, not kick them off in the amortization or a specific accretion number.

Daryl G. Byrd

And Terry, was your question on non-covered or covered?

Terry McEvoy - Oppenheimer

Yeah, things on non-covered.

Daryl G. Byrd

(Inaudible).

Michael J. Brown

I guess he enjoys the (inaudible) account right there. Everybody gets a bird in their life (inaudible). What I will tell you is, I think that's going to be very consistent, and I apologize Terry.

Terry McEvoy - Oppenheimer

That's okay. Thanks for everything.

Operator

Thank you. The next question comes from Christopher Marinac from FIG Partners. Please go ahead with your question.

Christopher Marinac - FIG Partners

Thanks good morning. Daryl and others, I am looking at the disclosures that we received last night today. it would seem that the operating earnings of $0.80 in the third quarter will be rising, something in the 90s during the fourth quarter, given your thought about $0.85 possibly be a kind of change and back. So, my question is that the returns that that [implies] in the fourth quarter do you think that those will hold during the course of the next year 2014 or do you see those returns getting stronger as next year develops?

Daryl G. Byrd

Chris I would start, I will let Anthony, I don't want to get too bold here. But we believe strongly as a company in continuous improvement. (Inaudible) Anthony, any thoughts?

Anthony J. Restel

Yeah, so Chris if you are (inaudible) the commentary right so $0.85, you add back the amortization on the profit portfolio, you are looking at kind of a $0.90 number.

At that point obviously, we have a strong focus on (inaudible) the core earnings, the core fundamentals of the bank. We would expect that to continue. There will be some obviously seasonal impacts as we move through the year, it raises a lot of things that we can't deal with. But our intent is to continue to make to progress and really drop (inaudible) soon.

Daryl G. Byrd

Just to point a fact on the investments I described in May, when (inaudible) and people. We still have a significant amount of capacity to grow with the existing people and infrastructure we have in place. So we are looking to have stabilized expenses while our revenue continues.

Christopher Marinac - FIG Partners

I guess I was also looking at the positive improvement from the net benefits from the operating initiatives on slide 12, that or, I guess, switch to positive is fourth and first continuing?

Anthony J. Restel

Sure. A couple of things, I mean. We've had excellent non-interest bearing growth, that is, we get some improvement in rates. That's going to become pretty valuable. Loan growth for banks very strong, our credit is pretty solid. So I think we got all the dynamics. I'm very happy with our fee income businesses, even though we had the kind of mortgage pipeline derivative issue in the quarter, mortgage origination volumes remain very strong and we are very happy with -- that title is doing well. Jeff Parker talked about his businesses, the wealth management, brokerage business, our Capital Partners business, our capital markets business, and he feels pretty good about all those and the continued progress there. So, again, continuous improvement.

Christopher Marinac - FIG Partners

Very good, thank you for the color.

Operator

(Operator Instructions). The next question comes from Bryce Rowe from Robert W. Baird.

Bryce Rowe - Robert W. Baird

Thanks good morning. John, I'm wondering if you could tell us what the impact of the mortgage derivative was for non-interest income in the quarter?

John R. Davis

I'm glad you asked. The accounting there is almost as much fun as the (inaudible) accounting. (Inaudible) in my opinion.

Anthony J. Restel

It was about a negative $1.8 million.

Bryce Rowe - Robert W. Baird

Okay. And can you compare that to the first quarter?

Anthony J. Restel

I don't have the first quarter with me, I apologize.

Bryce Rowe - Robert W. Baird

Okay. All right. That's all I had. Thank you.

Operator

Thank you. With no further questions, please continue with any other points you'd like to raise.

Daryl G. Byrd

Darien, thank you. I want to thank everybody for listening today and for your confidence in our organization. I hope everybody really has a great day and a good week and a good weekend coming up. So thanks very much.

Operator

Thank you. This concludes the conference of today. Thank you for participating. You may now disconnect.

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