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IBERIABANK Corporation (NASDAQ:IBKC)

Q3 2013 Earnings Conference Call

October 23, 2013 09:00 AM ET

Executives

John Davis - Senior EVP

Daryl Byrd - President and CEO

Anthony Restel - SVP, CFO and Treasurer

Randy Bryan - EVP and CRO

Michael Brown - Vice Chairman and COO

Jeff Parker - Vice Chairman, Managing Director of Brokerage, Trust, and Wealth Management

Analysts

Ebrahim Poonawala - Bank of America

Emlen Harmon - Jefferies

Jennifer Demba - SunTrust Robinson-Humphrey

Andy Stapp - Merion Capital

Matt Olney - Stephens

Terry McEvoy - Oppenheimer

Chris Marinac - FIG Partners

Peyton Green - Sterne Agee

Stephen Scouten - KBW

Michael Rose - Raymond James

Operator

Ladies and gentlemen, good morning, thank you for standing by. Welcome to IBERIABANK Corporation third quarter 2013 earnings conference call. At this time all lines are in a listen-only mode. There will be an opportunity for your questions and instruction will be given at that time. (Operator Instructions). As a reminder today’s conference is being recorded.

I’d now like to turn the conference over to our host, Senior Executive Vice President, Mr. John Davis. Please go ahead.

John 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’ve also prepared a PowerPoint presentation as 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 October 30th, by dialing 1-800-475-6701 with the same confirmation code as this current call, namely 304685.

Our discussion deals with both historical and forward-looking information. As a result, I will recite our Safe Harbor disclaimer. To the extent that statements in this report relate to the plans, objectives, or future performance of IBERIABANK Corporation, these statements are deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations and the current economic environment. IBERIABANK Corporation’s 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 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 call.

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

Daryl Byrd

John, thanks, and good morning, everyone. We reported GAAP EPS of $0.78 and operating EPS of $0.83 for the third quarter of 2013. This compares to $0.53 and $0.69 respectively that we reported last quarter and just a few penny shy of our fourth quarter operating EPS goal of $0.85. We have clearly made significant advancement towards that fourth quarter goal, the slight significant industry headwinds. We reported both net interest and non-interest income growth on a linked quarter basis.

Net interest margin continues to hold up pretty well, and it was above our guidance range. We experienced a decline in [growth rates] of mortgage originations due to rate movements during the third quarter. However, our other fee income businesses made up (inaudible) quarter and those new free income businesses that Jeff will describe. We’ve made significant progress in our trading and commission revenues in the capital markets business. This is the product that rollout of additional research coverage and maturing of our sales efforts.

(Inaudible) had another solid quarter of flat growth with income of 7%. Our legacy loans increased $295 million this quarter or a 16% annualized growth rate. In addition to consistent strength in our traditional commercial business, we also saw the continued development of our consumer and small business franchise. These businesses contributed $144 million to our loan growth this quarter and the portfolio of these loans yielded 4.85% at quarter end or 118 basis points above the commercial loan portfolio yield.

The straight and balanced nature of our loan growth since 2008 (inaudible) on slide four of our PowerPoint presentation. Total profits increased $309 million during the quarter or annualized growth rate of 12% and our mix of deposits continue to improve.

Slide five of the PowerPoint presentation (inaudible) the significant growth and favorable mix of our deposit base. I am particularly pleased with the goals displayed noninterest bearing deposits. At quarter end non-interest bearing deposits totaled $2.5 billion or 23% of total deposits. So in just the last 12 months, non-interest bearing deposits grew $678 million or 37%. If you go back to the end of 2008 we have grown non-interest deposits by $1.9 billion over the last five years, up from 15% of total deposits.

Our current results for the third quarter were stellar and favorably trending. Net charge-offs were only $239,000 from the $9 billion loan portfolio equal to an annualized rate of 1 basis point on average loans. We averaged 5 basis points of charge-offs for the last seven quarters.

Non-performing assets were down for the quarter, though decline would have been greater except for $7 million in market value of closed branches that we added to the other real estate owned category this quarter. I am really proud to classify assets excluding the core assets were down 46% year-over-year and equate to only $7 million to $8 million on the $7.7 billion legacy loan portfolio.

Loans past due were down to 75 basis points of total loans from 88 basis points in the second quarter. We really want to thank and appreciate the work of the relationship and credit management teams producing these outstanding results.

Finally, we made excellent progress on our expense initiative this quarter. During the third quarter we closed 10 bank branches and three mortgage locations. And at quarter end we were operating with 2,559 FEEs. Between March 31, 2013 and quarter end we reduced staffing by 163 FEEs or 6%.

Quarter to quarter operating expenses were down $4 million despite the $1.1 million increase in the provision for unfunded lending commitments. We've achieved the expected run rate we modeled for you earlier in the year. Anthony is going to provide additional color on these initiatives. We thank all of our associates for their focus on our expense improvement initiatives and helping us become a much more productive organization.

John I'll turn it back to you.

John Davis

Thanks, Daryl. I will now briefly walk you through the third quarter results compared to second quarter. As shown on slide six, our margin was fairly stable during the third quarter, down only 2 basis points to 3.37% and above the guidance range we provided for the year. The earning asset yield decreased 6 basis points and the cost of interest-bearing liability declined 2 basis points.

The yield on the investment portfolio was up 6 basis points due primarily to less bond premium amortization and the non-covered loan portfolio yield was stabled during the quarter. The FDIC covered loan portfolio yield declined 145 basis points which was primarily the result of accelerated amortization of the indemnification asset.

The income generated from the FDIC covered portfolio in the third quarter was approximately $8 million or $2 million less than projections that we provided last quarter. We're projecting the FDIC portfolio income to remain flat in the fourth quarter.

The volume of average earning assets increased $89 million or 1%, as legacy loans expanded $353 million on average partially offset by a $123 million decline in average FDIC covered loan and FDIC receivable. We experienced favorable loan growth on a period end basis, which was up $140 million on a reported basis and $295 million or 4% growth or 16% annualized growth rate, excluding the FDIC acquired loan run-off.

The decrease in the cost of interest-bearing liabilities were primarily the result of 2 basis point decline in the cost of interest-bearing deposits and $329 million or 16% growth in average non-interest bearing deposits. Period end non-interest bank deposits increased $474 million or 23%, while period end time deposits decreased of $104 million or 5% approximately half of the non-interest bearing deposit growth was organic client growth while the other half was a shift of very low yield and now accounts earning only three basis points to non-interest bearing accounts.

The balance sheet expansion and fairly stable margin resulted in tax equivalent net interest income increased of just under $1 million or 1%. Our net charge-offs remain very low equal to $239,000 on an annualized 1 basis point on average loans, this net charge off levels has been consistently low in each of the last second quarters. We recorded a provision of $2 million approximately equal to the provision in the second quarter.

Slide seven provides a summary of non-interest income items and trends. Non-interest income increased less than $1 million, 2% on a linked quarter basis. Mortgage related income declined $2.5 million, due primarily to the sustained increase in interest rates in the third quarter, caused volumes to slow considerably and our sales margins to compress. We hedge a portion of our pipelines in our audit which also rate on the lower revenues. Our mortgage loan originations totalled $507 million in the third quarter that’s down 25% compared to the second quarter.

Refinancings accounted for only 19% of originations in the third quarter compared to 31% in the second quarter. We continue to run about half the industry average. Mortgage loan sales volume was $552 million and that’s down $132 million or 19% on a linked quarter basis, the gain on sale margin on our flow business declined about basis points and the valuation marks were negative during the third quarter. The sales volume down and a compressed margin due to competitive pressures mortgage revenues declined $2.5 million or 14% on a linked quarter basis. On the other hand, mortgage commission expense declined $1.9 million during the quarter or a net decline in profitability of about $600,000 during the third quarter.

The large pipeline volume declined of $255 million at the end of June to $182 million at the end of September and has increased to $191 million on October 11. We’ve always seen some modest improvement in the pipeline, notably the higher mortgage rate level continues to suppress volumes.

Recent government shutdowns negatively impacted rural development loans, which are all purchase money loans and accounted for about 10% of our production volume. These loans require the submission of certain documents in order obtain a rural development commitment to guarantee. A portion of those loans were in a stage of a pipeline, we had not yet received the IV certification and so that process stopped which caused those particular loans to stop. Now the government has restarted and we expect plenty of those loans to close that have been delayed. The same applies to receive a tax transcripts from the IRS, which is really a fraud detection tool which has delayed some loan (inaudible).

One last mortgage comment, we’ve received some questions from the buy side and sale side regarding the mix in our mortgage channel. Our mortgage origination business is primarily a retail origination shop, less than 0.5% of our production sourced from correspondent and other outside parties and those are primarily targeted loans that are helping us in our CRA lending efforts.

Moving on to title insurance. Revenues were down 200,000 or 4% with the number of closings down 10% on a linked quarter basis and deposit service charge income continues to improve about 6% in the third quarter, ATM debit card income improves 5% as well.

The brokers business experienced a little less than 1% increase in revenues. IBERIA Wealth Advisors income was up 7%, our IBERIA Capital Partners income was up 5% on a linked quarter basis.

The rapidly changing interest rate environment and greater client preference for long term, fixed rate financing resulted in a very strong quarter where commissions drawn on derivative activity executed on behalf of clients.

In aggregate, our total tax equivalent revenues were up $1.7 million or 1% on a linked quarter basis. Non-interest expense trending is provided on the bottom half of slide eight. Total non-interest expenses decreased $9 million on a linked quarter basis or operating expenses which excludes the non-operating items declined $4 million or 4% to $106 million in the third quarter.

From a staffing perspective, our headcount declined by 52 associated or 2% during the third quarter. Keep in mind that this is a net figure and in bigger port net of staff additions. For example, we’ve recently added a fairly sizeable mortgage revenue generating team in San Antonio.

The upper left corner on slide eight provides a breakout of other more significant changes and expenses. Mortgage commissions and production incentives were down to $1.9 million due to the lower production volume described earlier, the other expenses have been trending as expected and Anthony will describe our profitability improvement initiatives this full year executed upon.

Slide nine, provides a summary of the non-GAAP reconciliation of income and EPS on a reported and an operating basis. And then slide 10, shows the quarterly trending of performance leverage. As Daryl described we reported $0.78 in GAAP EPS in the quarter, we look forward to $2.2 million in pre-tax merger related to severance termination and branch closure costs including an increase in provision for FDIC clawback liability and equal to about $0.01 in after tax EPS.

Excluding the non-operating items, operating earnings were $0.83 per share on an after tax basis. The capital ratios remained very strong. The leverage ratio at quarter end was 9.65% which increased 6 basis points during the quarter. Our PCE ratio was 8.64%, the Tier-1 common ratio was a very strong 10.95%. No shares were repurchased under the current share repurchase program, so we had a little less than 47,000 shares remaining to be purchased under that current program.

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

Anthony Restel

Thanks John. With my slides, I want to cover is the performance of the FDIC covered portfolio during the quarter. Overall, the portfolio's performance was below the expectations we provided last quarter. Net income on the portfolio was 21%, $2.1 million below our second quarter projections, as cash flows deferred from original expectations. The reduction in net income during the third quarter was largely driven by the pace of accelerated immunization, the increase in beyond the improvement in near term revenue as credit continues to improve.

Given the modest improvement we have witnessed in Florida over the last few quarters, I would suspect this trend to continue in future quarters until we get to the end of non-single family loss share agreements right next year.

We have included in the supplemental deck on slide 11. Our quarterly reforecast for the year end 2014 of the covered portfolio which includes adjustments to our forecasted revenue and IA amortization based on updated cash flow projections. You will notice we currently expect a net income in the portfolio to be flat in 4Q compared to 3Q.

From an asset perspective during the quarter, covered loans decreased $111 million, related loan loss reserves declined $15 million, and the indemnification asset declined $36 million. These declines were about $39 million lower than the projections provided last quarter.

As a result of the lower income and higher loan balances, the portfolio’s net yield was 3.66% this quarter compared to 5.11% in the second quarter. If you’re familiar with the earnings history of the company you will recall we recorded significant borrowing purchase gains on our FDIC acquisitions in 2009 and 2010.

But before transactions during the year we have clawback provisions where we may have to pay back to the FDIC a portion of these gains on the 10th anniversary of the transactions, it’s been somewhat materially better than expected. Even though we are passing or about to pass the fourth anniversary of these transactions as their historical performance indicates that we will add an amount at the end of the 10 year period of one transaction and we'll recognize the liability accordingly.

Specifically, we accrued $797,000 for likely clawback exposure related to the Central Bank acquisition which was completed in November of 2009. The formula to calculate our clawback liability is contractually stipulated and as you can imagine is complicated.

I would like to remind everyone that in order for us to ultimately all under the clawback provisions we have to receive assets that increased our income on loans. Unfortunately the carrying rules do not allow for us to meet or match the timing of the income on the loans with the clawback expense.

Moving on to the investment portfolio, we saw a $5 million improvement in the unrealized loss on the investment portfolio to $3 million at quarter-end due to favorable movements in interest rates compared to June 30th. The modified durations of the portfolio declined 4 months to 3.5 years with both yields on the portfolio improved 6 basis points to 1.98% during the quarter.

Bond premium amortization net of discount accretion declined $415,000 during the quarter to $4.7 million. It is expected that bond premium amortization will continue to slow into 4Q as the rolling three month projected prepayments fees drift downward. The investment portfolio grew by $48 million to $2.1 billion during the quarter and represents approximately 16% of total assets. We have not changed our portfolio structure or the nature of the investments we purchased during the quarter.

Switching over to earnings enhancement initiatives, I am pleased to announce that we have achieved 100% of the targeted $21 million run rate pre-tax enhancements announced during the first quarter conference call. And you will see the full benefit of a full run rate benefit of these initiatives in the fourth quarter as expected. Although this initiative is now complete, we will look and expect to see additional items that will improve our overall efficiency and earnings of the company as we move forward.

I would like to draw your attention to the effective tax rate for the quarter. We continue to project a normalized effective tax rate of 27% to 28%. However, this quarter was impacted by the true-up of our GAAP financials to our tax return filed with the IRS in September. There are many moving parts in our tax calculation used in summing our tax liability. We did post or we did have an estimated impact to the cash provision and net income of $665,000 during quarter and we do not expect this to occur in the fourth quarter.

Last thing I want to briefly cover is our forecast for the fourth quarter. During the first quarter we announced that projected GAAP EPS of $0.85 for the fourth quarter of 2013 was a net interest margin in the range of $3.30 to $3.35. The slightly outside practice recently impacted our mortgage and title businesses, which were not extracted when those projections were communicated at the end of the first quarter. We have made tremendous strives reducing the expenses and improving other areas of non-interest income to largely neutralize the impact of the slowdown in those businesses beyond the normal seasonal norms we had expected. Accordingly, our most recent monthly forecast still indicates we will achieve an $0.85 GAAP EPS in the fourth quarter. Our expectation on margins for 4Q is 3.35% at the higher-end of original expectations.

Now I’ll turn the call over to Randy.

Randy Bryan

Thanks, Anthony and good morning everyone. Our strong and consistent asset quality continued in the third quarter. The pace of resolution of problem assets in covered portfolio is steady and we now have less than $1 billion of these assets on the books. At September 30th total covered assets were $894 million. We added a new table, Table F in the press release to provide some additional granularity and reporting on acquired assets. We have stated previously we are committed to providing appropriate and effective loans disclosure on these portfolios particularly as we approach into last year coverage and portions of the book.

Before reserves we had about $81 million of covered assets associated with the 2009 CapitalSouth acquisition or -- loss share coverage within the next 12 months. Of that amount, approximately $76 million of loans we had nearly 18% allowance for loan losses. An additional $394 million in loans from Century arrived in the Sterling deals we seek to be covered in the next 12 to 24 months. The balance of the covered loans are $337 million are single-family residential and will have coverage for five years and more.

In our continuous process we are viewing these portfolios off balance. We see more improvements in credit and loan loss expectations than we see of the opposite. On some of the largest and most challenging credits the combination of factors including borrowers that have endorse their legal defenses improving asset values and outlooks and a consistent application reflected work-out strategies are moving to collection that amounts at times in power plus cost in excess of our own projections. All this can create [noise] from the accounting standpoint in the near-term. In the end these improvements will have a net positive impact.

Slide 12 shows the steady progress that we are making. NPAs in the FDIC book fell nearly 14% from the second quarter and 38% in the third quarter of last year. NPAs in the acquired impaired SST 3-3 book has dropped by nearly the third in the past four quarters since our last acquisition came in line.

Referring to page 13 of the deck, I will review some legacy bank asset quality metrics, which excludes both the FDIC covered loan portfolios, as well as other acquired loan portfolios. Table 6 is an update from prior releases now excludes all acquired assets. In previous versions, only covered loans and acquired impaired loans were excluded. For the quarter, non-performing assets decreased slightly to $75.9 million and represented 56 basis points bad debt count from 59 at June 30th.

Over the past five quarters NPAs have been in a narrow range of 65 to 69 basis points of assets. Non-accruals were down about $5 million in the second quarter offset by a similar decrease in OREO. As mentioned earlier, the increase in OREO is largely reflected with the additional surplus branch real estate and is [bypass] of our cost reduction initiatives.

On an annualized basis legacy net charge-offs in the quarter (inaudible) or about $300,000. At quarter-end, the allowance for credit losses for the legacy book was 99 basis points, which is up 2 basis points from last quarter. Net yields as a percentage of non-performing assets stood at 123% versus 94.6% in the second quarter. Reflecting strong organic loan growth, reserve unfunded loan commitments increased 15.6% in the second quarter to just sharp $12 million. As a reminder, since separating the reserve unfunded lending commitments from the [ALLL], this $1.6 million flows through with non-interest expense not as provision.

Turning to page 14, let's shift our focus from the legacy books to the entire portfolio, which includes the covered and all other acquired loans where the story is very consistent. During the quarter, non-accruals declined 15.6%, OREO decreased 0.4% which resulted an 11.4% decrease in overall NPAs slightly better than the approximately 10% decrease we experienced in the first and second quarters. Loans past due 30 to 89 days decreased 25% to $26.1 million.

For the quarter, annualized net charge-offs amounted single basis point. Over the past several quarters annualized net charge-offs averaged 5 basis points. As noted earlier, we recorded a provision of $2 million in the quarter in light of the prior quarter. It is worth noting that the covered assets decline and proceeds of redeploy, the earnings would have facilitated the volatility of the covered loan yields also declines.

In the third quarter, net interest income from the covered portfolio is equals to 10% and that of the legacy book and represented only 7.3% of total interest income. Interest income from the investment portfolio exceeded better in the covered book. In short, revenue from the covered loan pools is a much smaller piece of the overall product.

In closing, in the third quarter, IBERIABANK continued to demonstrate consistent and strong asset quality, disciplined loan growth and continued -- of our risk management infrastructure.

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

Michael Brown

Yeah. Thanks, Randy. We feel like the third quarter was a pivotal one for the company and specifically our markets. When we last talked, we were focused on bringing more attrition through better expense management than being more profitable through having growth with attractive returns. The third quarter's results reflect these efforts. At the most basic level, we have market leadership clear on what actions benefit the income statement and what actions hurt the income statement. This is now reinforced by the risk adjusted return on capital performance measurement which was rolled out during the third quarter.

Before I talk about market performance for quarter, I’d like to provide some details on our recent benefits announcement. IBERIABANK methods have been solid performer with the focus on commercial business banking and private banking clients. Considering that success we were thrilled to be presented by the opportunity to expand our Memphis franchise. In addition to the obvious addition of clients through acquired loans and deposits, we will be able to add a number of branches which will help our existing franchise to capture a greater range of business opportunities. The bank will have seven branches in Memphis approximately $500 million in loans and $350 million in deposits.

Now back to the quarterly performance. As we walk through the company’s income statement, I will begin with revenue contribution. Despite the ramp up in competition which has increased significantly over the past 180 days, we continue to see good client growth during the quarter. Loan growth, which I will discuss in greater detail in a moment, was balanced with growth coming from all segments.

Growth was at a lesser level in the third quarter than the record level in the second despite originations being at similar levels. This was due in large part for elevated refinance activities experienced during the quarter. Refinance activity was not prior to loans moving to other banks, but rather loans moving into the longer term market. As the permanent market is opened up for real estate of all types, followers are choosing to move debt into distant market and take advantage of still very attractive terms. We offer these loans that are intended to be refinanced long-term at some point so the impact is not necessarily a surprise. We’ve also seen consumers will come back for the loans and of course move to some refinance activity, the pace of this activity [clicking] with the rise and rates during the quarter.

Finally at the same time we continue to see our reserve-based clients move fundings into the long-term market as well, taking advantage of still attractive rates. Although this impacts loan levels, the good news is we pick up income from these refinancings through IBERIA Capital Partners and as with any capital incentive business the opportunity for future borrowings.

With respect to the loan detail, we’re pleased to see more balanced growth during the quarter with growth coming from commercial business banking and consumer. Commercial loans accounted for 60% of originations during the third quarter with the balance from the other two categories.

As outlined on slide 17, total originations for the quarter are about $1.2 billion and were behind the level of the second quarter. Funded loan originations totaled $790 million which was behind the second quarter by about $18 million.

The average term for originations was [7.1 million] which was up very modestly from the level of the second quarter. The average coupon was 4.01% in the third versus 3.84% in the second. The high coupon was reflecting more origination to be fixed 57% versus 43% floating. And as noted earlier, we saw more balanced growth profile which results in high yields from consumer and business banking loans versus commercial.

And as already mentioned loan growth was 295 million for the quarter, which equates to an annualized level of 16% which obviously got expanded. On the commercial front, growth was double-digit when annualized despite the paths discussed earlier, and growth is stronger in commercial real estate and C&I but that is not necessarily indicative of a permanent change.

As we discussed last quarter we have been more active in Florida, we've got more comfortable with sustainability of the market and our ability to connect with higher quality clients. This will temporarily skew production towards commercial real estate, but we’re still trying to strive towards balanced growth longer term.

The commercial growth ultimately was high from Texas, Arkansas and Florida. As with the second quarter, in third quarter we saw an increased focus on business banking throughout the company. We are encouraged by initial results for this business and expected to play greater part in the future portfolio growth. This is important for us because of the high yield associated with these loans, the high relative deposit levels and the ability to cross sell into broader way of credits and non-credit products.

Good news for the quarter was originations and net loan growth were both high in the third and second. On the consumer front similar good news, consumer clients were a large contributor to loan growth during the quarter with good growth reported for all loan products including indirect order and home equity. In part, the home equity growth reflects the traditional cyclical spike in home equity lending during the summer, but it also reflects a significant increasing focus on the business to get more out of our retail networks.

As with business banking, consumer lending relative to (inaudible) higher yields and much greater granularity than traditional commercial portfolio.

Finally, we saw good growth during the quarter from our private banking mortgage portfolio. As we have expanded our private banking businesses into more of our markets, we’ve seen a pickup in lending activity. It is important to note that these loans are primarily arms and are considered the entree to larger relationship with the client as the primary liability for typical private banking client, getting the clients mortgage puts the bank in lead position for other business including fee related activities such as (inaudible) management growth.

In addition to revenue growth from spread income we are continuing to push growth in fee income. As rates have started to return to more of an upward path, we can move clients into derivatives to fixed rates. We believe using derivatives as an available option to facilitate long-term fixed rates for our clients in light of the step taken arriving rate environment. This effort shows significant traction during the third quarter and expects derivatives related income to continue to be growing part of our income stream. We also have seen good growth in service charge income with our treasury credit management fee income for the first nine months of this year growing approximately 31% in the same period with last year. Treasury management has a potential to be a much larger contributor to our bottom line and expected to continue to upgrade our product set as we did with online banking during third quarter. Our goal is to become the best in class treasury management bank. We think diversifying can (inaudible) from spread income will be very beneficial to the bank longer term.

From an expense perspective we can see the chip away both branch and people infrastructure. During the quarter we closed 10 branches and reduced market level staffing by 60 people. I told in the past year we had closed 25 branches and since the end of April this year reduced market related staffing by over 130 people or approximately 9%.

These efforts have contributed meaningful to the significant reduction in overall expenses the company has achieved since the expense reduction effort was announced towards the beginning of the year. And it’s obviously not gone in the way of our ability to grow the organization which is tribute to the employee base.

We also continue to improve our deposit mix with the intent of growing our funding cost. As you noted from the press release the various category for deposit growth remain non-interest bearing. Combination of organic growth with rising prospects and the transition of certain accounts in interest-bearing to non-interest bearing resulted in the significant increase in non-interest balances.

Non-interest bearing deposits account were 23% of total deposits as Daryl detailed, that’s through the end of the third quarter, and as I outlined on slide 20 it was up materially from the second and effectively double from the end of 2010. We are clearly very positive about the change. With respect to other deposit categories we continue to see reduction in time deposits as consumers opted to keep deposit balances short.

Overall net deposit growth was $309 million or an annualized growth rate of 12%. We feel very good about the deposit growth particularly (inaudible) on continued growth in loan portfolio.

So in summary a great deal of progress has been made on both managing the expenses at the market level and continuing to grow revenues. We feel like we are making good progress on managing down our expenses by eliminating investments that are not providing regional returns and then focusing on continuing to grow our revenues where we can see attractive returns. Let me pass it on to Jeff.

Jeff Parker

Thanks Michael. And good morning. As the brokerage, trust and wealth management businesses show steady results for the third quarter, I call your attention to slide 23 in our PowerPoint presentation that highlights the revenues of IBERIA Capital Partners and IBERIA Wealth Advisors. These combined top line numbers were the second highest in the three year history of these businesses, and the results were in line with our budgeted expectations.

IBERIA Financial Services posted steady results and continued the nice recovery from the slow start in the first quarter. IBERIA Wealth Advisors, our trust and asset management business, grew assets under management to $1.1 billion at the end of the quarter, an increase of about 12 million or 1% in assets under management. Revenue was 1.515 million, our best quarter since formation as John Davis up 7% on a linked quarter basis versus $1.415 million.

IBERIA revenue was up 28% year over year. Louisiana revenue was up 56%. And again I would like to credit the new (Inaudible) teams as they deserve special recognition. Alabama revenues up a 111% year-over-year and we continue to make good progress. I mentioned in last quarter that Florida and Arkansas had struggled a bit. We believe that each were reaching their low point and would once again begin growing in the second half of 2013.

We saw a very nice pickup in revenues in Arkansas in the third quarter and we are holding a grand opening of our new offices in Fort Lauderdale (inaudible) in a couple of weeks.

IBERIA Capital Partners revenues have been bolstered by investment banking activity in the first half of the year. Actually year-to-date we participated in 15 transactions in the first nine months versus 10 transactions in all of 2012. (inaudible) during the third quarter although we did see a slight decline in banking revenues as the average size of the deal was marginally smaller.

The big news in the third quarter was that we experienced a very nice pick up in daily trading revenue as Daryl mentioned earlier. Trading and research revenue were up 46% from the second quarter and up 38% year-over-year. Overall earnings were about breakeven before expense allocations. We're providing research coverage on 77 companies at quarter end, up from 72 at the end of the second quarter and up from 62 at the end of 2012. We’re continuing to add coverage on additional energy companies and as previously stated we have a goal of providing research on a 100 companies by year-end.

And our commentary on IBERIA Financial Services over the past few quarters, we mentioned that we will be focusing on stimulating activities in Florida, Arkansas and Alabama markets and then we believed that we were seeing leading indicators that suggest this business will return to our budgeted levels. The bank’s branch brokerage business performed well again in the third quarter and had revenues of $2.3 million flat on a linked quarter basis. Louisiana revenue was down slightly (inaudible) in its second best quarter ever. Arkansas and Florida recoveries from the first quarter continued, had new personnel in those markets are getting excellent attraction. We have continued to build these three businesses and the combined results have been added into bank profitability in three out of the last four quarters. Our focus will continue to be topline oriented but we'll also remain very concentrated on bottom line profitability, in line with something we’re talking about on this call today.

At this point, I’ll turn the call back to Daryl Byrd.

Daryl Byrd

Joe thanks. We’re pleased to receive the Federal Reserve’s approval for our branch acquisition in Memphis. We’re excited to have the opportunity to improve our distribution system and add sale of the Memphis market. We've got a great Memphis team, this gets a significant image in the market. And then finally just I want to thanks all of our associates for their dedication and efforts in producing an excellent quarter and I’d like to open the call for questions please. Tom?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question today comes from the line of Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala - Bank of America

Good morning guys, Ebrahim here.

Daryl Byrd

Hi Ebrahim, how are you doing?

Ebrahim Poonawala - Bank of America

Good. So I guess my first question is just sort of bigger picture in terms of, you obviously met targets in terms of the expense initiatives that you have laid out. I think when we look at the core efficiency ratio of about 74% in the third quarter, what should we expect in terms of improvement over the next several quarters? And I understand that there are two sides of the equations where looks like there should be some help from on the revenue front as well, but just trying to understand as we sort of set expectations heading into next year, how should we think about the improvement on the efficiency ratio and sort of that translating into improved ROE?

Daryl Byrd

Ebrahim, the way I would tackle that one is we are pretty happy with what we’ve done from an expense perspective and through the initiatives over the last year to two years. We certainly haven’t stopped. We have more thoughts in terms of what we can accomplish there. We’re not announcing anymore. So we kind of hit that one off. But we do think we have some opportunities to continue to work expenses, but as important and you mentioned it in the two sides of the equation we are pretty happy with the way the new businesses that we’ve built are coming online, very happy with what Bob Kottler is doing in terms of our small business and consumer efforts. I think that’s going to be a huge impact for us as a company. And so we feel pretty good about forward momentum in that perspective.

Anthony, do you have anything else to add?

Anthony Restel

No, I mean the only thing I guess if you kind of look kind of moving through the fourth quarter, clearly we closed a number of branches towards the end of the third quarter and so we’ll have the benefit of that as we head into the fourth quarter which will help on the expense side as we kind of moving into next quarter. So I think you will continue to see movement positive progress on the expense side that we had into the fourth quarter. Our intend clearly to kind of carry that momentum moving forward and so that’s really all I have got there.

Daryl Byrd

And John do you have anything to add on both of these sides, because I think what we’ve accomplished in terms of building out some new businesses is we’ve kind of created a new revenue source that can kind of help us. I think you wouldn’t expect that kind of zero interest rates forever. And so at some point you expect kind of the refinancing and the kind of the mortgage room we’ve had over the last year or so to think a bit now, the good news is we’ve build some businesses and I think that help us kind of balance that out and give us good synergies.

But John I also think, we’ve continued to build our mortgage business and we have had some upward momentum there that’s probably not appreciated at this time.

John Davis

I would say we are trying to really work both sides as we’re trying to ensure that we’ve had revenue growth opportunities, at the same time we’re trying to become more efficient in what we are doing. Obviously there is a big change that has taken place, but in the third quarter with the rate movement at all which is not necessary sustainable. You had a question just as all over basis, I think we’ve got a very strong business and just want to have some cyclical changes and seasonal changes.

Daryl Byrd

It should also continue to grow your origination takeability, right?

John Davis

Absolutely, yeah. As mentioned a while ago, we had brought on a team on San Antonio is really sizeable team that we think is going to be a very good positive element for us on a go forward basis and we’ve had plenty of other opportunities we think out there will include additional mortgage origination side.

Daryl Byrd

So Ebrahim, you obviously know we are not going to give you a number but we feel pretty good about the forward momentum.

Ebrahim Poonawala - Bank of America

Fair enough. And I guess just on mortgage banking, I think two questions in terms of, I guess I understand sort of the capacity that you’ve build and the infrastructure that you’ve build which looks sustained sort of market share opportunities on the mortgage side. So I wanted to get a sense of how much additional sort of fall off should we see all over sequel on that mortgage banking line and what mainly for hedging gains that benefited mortgage banking from this quarter?

John Davis

I can start, I guess Daryl, you could add if would like. There are couple of different components that really are hitting in that mortgage line. One is we have gain on sale obviously that’s part of that and its best efforts pricing associate with it we have implemented mandatory been able to sell mandatory delivery as well, which there is a pickup associated with that and you have done that over the last couple of quarters I guess we have implemented that program.

We do hedge the portfolio as best we can. There is obviously element of that portfolio is not going to be hedged. But we do see that there is some risk adjustments that have had taken place this most recent quarter based on the rate movements as we had some negative market value adjustments to queue our pipeline and to the locked pipeline and to the warehouse. But those are items that I think are just going to come and go. I will still say they don't describe, we’ve just got a very strong group of people who are excellent in the mortgage business, they have been in the business for a long time.

We go through ups and downs, we've got very much way geographically dispersed teams. So we're not really dependent upon one particular geography like I think some others. I think as we mentioned, we are, it's a retail mortgage business, it's not corresponded for wholesale in nature. So we shouldn't be going through the same ups and downs that others do in that respect.

And it is very much of a purchase money business, not refi related. So while we are affected by rates and clearly you saw that this quarter, I think the volatility that maybe you see and another you shouldn't necessarily see the same out for us. I hope that helps.

Ebrahim Poonawala - Bank of America

That helps. And any sort of hedging gains this quarter?

John Davis

This past quarter?

Ebrahim Poonawala - Bank of America

Yeah.

John Davis

They were offset obviously by market value adjustments that were on the balance side.

Ebrahim Poonawala - Bank of America

Understood. Okay. Thank you very much for taking my questions.

John Davis

Thank you Ebrahim.

Operator

Our next question comes from the line of Emlen Harmon representing Jefferies. Please go ahead.

Emlen Harmon - Jefferies

Hey, morning. Thanks for taking my call. I guess maybe a quick one, just on the FDIC clawback liabilities Anthony, I know those -- Tony maybe you could provide us just a little bit more color and kind of how we expect those to trend as we get out over the next few quarters here obviously kind of a credit driven, but just kind of curious how often you reevaluate that portfolio and whether we can kind of tie that to performance and what we see in the FDIC losses?

Anthony Restel

Yeah, I don’t -- here is what I’ll tell you about that. It’s going to be lumpy in terms of that clawback exposure is getting created as we have positive surprises to close and get credit, right. So unfortunately and clearly you can see we have challenge modeling all the customer behavior because we really do not exactly know what’s going to happen every month. I won’t tell you that my expectation is that number will not grow into some large number. We’ll have some de minimus amount of expense that we’ll have to do periodically, but it shouldn’t be material to income statement.

I won’t tell you that we have taken the approach that we don’t want to be surprised on the back end. So what we're doing is how you should go type of things. And we look at it every month and if we need to put a $100,000 in we’ll put a $100,000 in. This will not be an item that will turn into, I don’t believe millions of dollars or anything to that extent. I think you’ll see small numbers again shouldn’t be material to the income statement and very difficult for us to project. So, the bad news is, it is hard for me to give you and exact answer, the good news is I wouldn’t expect for us to be material to our overall expense on a go forward basis.

Emlen Harmon - Jefferies

Got you. Okay, thanks. And then maybe just a little bit help on understanding the derivatives business it sounds like that’s something decline derivatives business it sounds like that’s something you guys are getting more involved and in just in terms of the environment that that benefits that business most. I mean do we expect that to be pre-closely tied of what we see with kind of tenure rates and how do we think about kind of the best operating environment for that business?

Randy Bryan

I’m going to let Michael and Anthony kind of cover that. We’re actually very excited about that business going forward. So Anthony, can you kind of talk about the change in interest and Michael....

Anthony Restel

A couple of things, just one is so we've had this products in our bank since about 2004, so it’s not something new that we’re just starting. What I’ll tell you is, when you think about the past year of interest rates with a particular emphasis that the fed has given people some confidence that short-term rates would be fairly anchored well for an extended period of time. One thing that we saw coming out of second quarter is there were some I guess for a lack of better words NIM duty from the fed which calls a market to react, I think that calls some people who talk rates would stay low for an extended period of time, I think that made people revaluate their deposit and want to fit in quality rates and we did get some activity from that.

So a way of large following for us is quite simply, we had a tremendous amount of origination that we do on a quarterly basis, I think everybody have seen those numbers for a while. Most people if you ask them would agree that rates eventually will go up. And I think what people saw coming out of the second quarter is eventually saw getting closer to us and maybe what it was in the prior year. And for the lot of people that are willing to evaluate, does it make sense to go ahead and do a swap.

As Michael indicated in his comments, our preference would be in the rising rate environment not to put stuff on balance sheet if we can avoid it, so we’re all trying to lead especially on larger fixed rate deals with us, a very synthetic fix by using a swap. So I think in a rising rate environment it’s a great opportunity going for us to sell more products. So I think we’re starting to see it in terms of the number of closed and the amount of activity that we are seeing around it.

We do have some transactions already closed in the fourth quarter. And so I think it’s something that will build nicely as we move into next year, but a lot of it’s just driven by kind of, I won’t say our client’s expectation where interest rates to go on. Michael?

Michael Brown

Anthony did a superb job summarizing the opportunity. It is a function of rates moving up, at least from a client expectation rates will be moving up at a reasonably rapid pace so they are trying to push out their fixed rates and we’re just preferring not to put those on the balance sheet and rather using derivatives to go ahead and synthetically fix them. In part it’s back to one of the comments I made earlier about competition, a lot in our industry are willing to take longer term fixed rates off to the balance sheet and based on past experiences that doesn’t end particularly well for commercial loans, those commercial portfolios.

So again it’s a products that we have a while, we just see the opportunity ramping up pretty significantly and we’re just trying to be ahead of it.

Randy Bryan

And we are putting more emphasis on the products that actually are [settled] with fee income kind of opportunities that we see out there in our future. Emlen, other questions?

Emlen Harmon - Jefferies

If I could maybe just one last quick one on the mortgage banking business. If a gain on sale decline was about I think 20 bps in the quarter, it’s probably going to be maybe a little bit less than we’ve seen from some of your peers. Can you talk a little bit about kind of what allowed you to defend that. And do those hedging gains that John mentioned a few minutes ago, do those hedging gains actually contribute to the, I guess stability in the margin?

John Davis

This is John Davis, I will take the second part first. Yeah the hedging gains I think certainly helped minimize the volatility and we’re very pleased with the results. We think we have done very well in that regard, very pleased how that book paid out. I will say though that (Inaudible) that’s the unfair margin, that’s best efforts pricing on a flow business. And that’s what we’re selling to investors on a best efforts basis.

Now again as I mentioned, we do mandatory deliveries, so there is some additional benefit there, but I’m trying to give you a sense of that best efforts pricing really gives you an idea of what that competitive nature and the market conditions that we’re facing so there could be benefits that we’ve garnered from the mandatory delivery side or some benefits from other hedging and things of that nature. But again I’m just trying to give you a sense of what’s happening from a competitive perspective.

So yeah, we have seen some pressures on the margin. And that again is driven by more of [best efforts] we’re very much focused on refinancing now that we’re going into purchased money and thus affecting the purchase money pricing. But again we have a very broad market that we serve, we had a great group of people with many years of experience that are very well following and I think help us do the ups and downs of the cycle.

So again, I’m trying to remind you that we do have mortgage income line that gain on sales just a portion of that there are other items in that line item including origination fee or underwriting fees, servicing income and things of that nature. Well, there could be some moment there and maybe up or down different relative to what other people are doing, they may have business mortgage in there as well.

Emlen Harmon - Jefferies

Got it. All right, thanks guys.

Randy Bryan

Thanks, Emlen.

Operator

Our next question comes from the line of Jennifer Demba with SunTrust Robinson-Humphrey. Please go ahead.

Jennifer Demba - SunTrust Robinson-Humphrey

Thank you, good morning.

Michael Brown

Good morning, Jennifer.

Jennifer Demba - SunTrust Robinson-Humphrey

A question on the capital markets and wealth management businesses, I wonder if you could give us a sense of how they are performing individually rather than together and their earnings contributions either separately or together at this point and then I have a follow-up question on operating expenses?

Randy Bryan

Yeah Jenny, Jeff is going to take this one, but I do want to comment that I think the group has done a terrific job and it's really, it's not a combination of additional research that we've got now in terms of [maturing] of our sales effort. I think what I'm so pleased with is our trading and commission revenue was not significantly in the quarter and we feel pretty good about where we are with that and then the capital markets business saw the equity issuance or debt issuance saw kind of the other element there that have been pretty good to us that should really want to get that trading and commission revenue up.

And I think Jeff has done a great job with that, his team has done a great job with that, feeling pretty good about that. So Jeff?

Jeff Parker

Okay. Thanks. Jennifer I think let me take a moment of time. As far as IBERIA Capital Partners is concerned, interestingly that was just eight days ago that the business celebrated its third birthday. So we are truly been up and running for three years now. And as you know moving to capital markets business the way which should give our clients that we have developed over the past three years were not clients of IBERIABANK. As you know, we do business in all the markets at the major money centers of the country and in other places of the world.

And so one of the things about our numbers that I’m pleased about is that we have had to build our brand, they knew who IBERIABANK was because if you and others that followed IBERIABANK, but they didn’t know who IBERIA Capital Partners was and they didn’t understand the energy business and that we were going to be talking about that. And they didn’t understand the synergies that I think have also been built out in the same period of the time, Michael talked a little bit about it on the energy lending side.

We had committed to becoming profitable last year by the end of the year which we did. And what I touched in talking about the quarter and the numbers what we're presenting to you and others are still numbers that I think were broken out, will be a loss to break out the numbers today or not and give you the individual business numbers because the other business there was good result also this quarter is IBERIA Wealth Advisors and that obviously is a little bit different. We've projected that business would become profitable towards the end of this year. Again we started with a very, very small business and today it’s $1.1 billion in assets under management with plenty of opportunity to grow. We look forward to talking about earnings contributions and where that becomes.

I guess what I would say to you is this, three years ago the combined businesses of IBERIA Financial Services, IBERIA Wealth Advisors and IBERIA Capital Partners were running around $3 million on an annualized basis in terms of revenues. If I look at last month and quite frankly this month looks like it’s better, now if I look at last month run rate in terms of revenues it’s between $23 million and $24 million for those three businesses.

So as I’ve said earlier, we're working on trying to grow that top-line and grow the bottom-line as well. I would look forward to giving you more [granularity].

Jennifer Demba - SunTrust Robinson-Humphrey

Okay. Follow-up on the expenses, Anthony. Just curious as to, you said you get a benefit of your branch closures and at their efforts in the fourth quarter, can you give us sort of what you think the normalized expense run rate will be going into the beginning of 2014?

Anthony Restel

Jennifer that it kind of goes back to kind of Daryl says about, we are obviously not providing any guidance in terms of next year. What I’ll tell you is you should expect to see expenses kind of continue to drift downward into the fourth quarter versus the third quarter. Obviously we run into some seasonal issues in the first quarter rather than we started to repay and payroll taxes and other things which will kind of reset the number, but my expectation is that we continue to be very methodical in approach to looking at our sense levels. We've had a number of new initiatives that we’re looking at both on the revenue side and on the expense side to continue to see those improvements as we kind of move through the year.

I’ll remind you I think one of the key things [of guiding] is we’re still able to go higher, the strategic higher as John mentioned in the mortgage company. We still invest in the company whether it’s online banking platform, our mobile technology deals and capture deposits on the mobile devices, all of that came through in the last quarter. So we’re still able to kind of move and due to things we drive the revenue side, but there is focus on the expense side. Again we will see the expense levels come down in fourth quarter and my intent, my goal is to try to manage that and be methodical as we can bring turning that expense line early next year.

Jennifer Demba - SunTrust Robinson-Humphrey

Thank you.

Daryl Byrd

What looks like is we are going to continue to be very focused on expenses and frankly we are going to be very focused on continuing to improve the top line.

Jennifer Demba - SunTrust Robinson-Humphrey

Thank you.

Operator

And we will go to line of Andy Stapp with Merion Capital. Please go ahead.

Andy Stapp - Merion Capital

Non-interest income was up quite a bit, even though we back out the derivative, I should say the other non-interest line item was up quite a bit even you back out the derivative income, was there any non-recurring items there?

Daryl Byrd

No.

Andy Stapp - Merion Capital

Okay. So that’s a good one. And just if you could also talk about your net charge-offs were negligible but your provision was up, just curious what was driving that?

Daryl Byrd

That’s largely a function of continued growth in the loan portfolios as we talked about. We provide in traditional sense for the allowance for loan losses and then also for the reserve for own funded (inaudible) largely a function of knowing your deterioration asset while just continued strong growth in our loan portfolio.

Andy Stapp - Merion Capital

Okay. And are there any signs that the competitive environment for loans is easing?

Daryl Byrd

Michael.

Michael Brown

Andy, I don’t think so. It’s the reverse. I think the competitive environment is getting worse and it’s around pricing and structure if not just loan.

Daryl Byrd

Andy the good news is we think we’ve got pretty model in terms of the where we built (inaudible) building strong relationship teams in a lot of different markets and they are also taking share and during their class come over to us and clients are focused on relationship they have hopefully over price and growth structure.

Andy Stapp - Merion Capital

Okay, thanks guys, good quarter.

Operator

And we have a question from Matt Olney with Stephens. Please go ahead.

Matt Olney - Stephens

I believe there was a Randy that made some comments in the prepared remarks about the contribution of the purchased account accretion has declined relatively to the overall earnings for company. I just want to make sure I am doing math right here. So I am thinking about this the right way, the contribution of the purchased accounting to earning to EPS was about 40% of the total on 2Q and now it’s about 21% of the contribution in 3Q. So say it in other way the contribution is about half of what it was in the previous quarter, am I thinking of that just the right way?

Daryl Byrd

Matt, (inaudible) you are obviously independent the number there with the different measure and we will look at it. I will tell you that when we look at the net income, we know you look at that, that accretion on the portfolio that net income represents somewhere around 7% and 8% of our income. If you go back and look at it versus prior months obviously we’re in the carve out low teens. And so I think the message Randy was trying to communicate is to couple with and obviously the yield in that portfolio although disappointing have declined to a level to be quite honest retransfer those assets and we redeploy into our regular loan book, we are going to see a pick up from that.

Anthony Restel

The other message I think that is out there is just to the magnitude of the portfolio and now it is going to sub $1 billion with the FDIC receivables kind of drifting down to a level that, although it’s actually noise created to an ability to get cash flow to 100% perfect. From income perspective, it's just, it's becoming less and less important to the grand part of our income.

Daryl Byrd

And to be clear Matt, (Inaudible) looking at interest income and the portion of our interest income resulting from the FDIC covered book relative to our total interest income and the point that you just made really the key point there which is as we continue to bring down those balances, we deploy those into loans at structured loan out of making are dependents on the income from that whole just continue to decline (inaudible) decline and any variability in the yield on that loan is really represents less of our risk to our earnings because just a smaller, much smaller piece to pie as you pointed out and was the quarter ago or year ago or three months ago

Matt Olney - Stephens

Okay. So if I think the purchased accounting accretion in the third quarter, I guess the runoff versus 2Q was about $4 million or less in 3Q than 2Q. But your NII was still up $1 million. So, is it fair to say that the core NII (inaudible) was up about $5 million sequentially in 3Q?

Daryl Byrd

Yeah. You can assume that.

Matt Olney - Stephens

So that's about 25% annualized growth versus the last quarter. So Am I doing that math right, is that sound about right to you?

Daryl Byrd

Matt I was doing math, I think what you laid out aren’t logical.

Matt Olney - Stephens

Okay. All right. Thanks guys.

Operator

Our next question is from the line of Terry McEvoy with Oppenheimer. Please go ahead

Terry McEvoy - Oppenheimer

Anthony, just clarify your statement on 4Q expenses being down. Are you using 108 as the starting point, or 1059 when you make that statement?

Anthony Restel

So we had an operating number of 406 our sense it will be below 406.

Terry McEvoy - Oppenheimer

Okay. Just wanted to clear that up. As you talked about the growth initiatives in Memphis, any sense of expenses, how large those would be and when we will potentially see those?

Daryl Byrd

In terms of one-time items or?

Terry McEvoy - Oppenheimer

No, just adding branches and just to general expansion plan that you talked about in your prepared remarks?

Daryl Byrd

This would be more of a ‘14 issue same with the revenue benefit.

Terry McEvoy - Oppenheimer

And then just lastly any thoughts on the buyback you've been on the side line for to last couple of quarters, how do you think about repurchasing stock?

John Davis

Yeah. Terry, this is John Davis. I would say that we have been very active in repurchasing shares historically. Our preference is really more to be used in that capital for other purposes, just when our share price moves and we feel like that’s the right investment relative to the alternatives we had at that point in time.

As you can see we have had very strong balance sheet growth so obviously using some of that capital for that. We do pay dividends, we do have acquisition opportunities that will be closing on the Synovus branch acquisition in Memphis. So there are number of activities in that respect that are all going to be need of capital at some point in time. So again we use that share repurchase program as an alternative investment and those alternatives and that is the best investment at that point in time. So that’s how we approach the program.

Terry McEvoy - Oppenheimer

Great. I appreciate it. Thank you.

Operator

Our next question is from the line of Christopher Marinac with FIG Partners.

Chris Marinac - FIG Partners

Thanks, good morning. Daryl can you talk about deposits, so if you step back and feel the success you have in deposits for last several years, not just last quarter what do you think that tells you, you have markets, you can use that chunk for your markets that are stronger than other parts of the country, just curious if this is partially due to focus on this and what does this mean, I guess in the next couple of years unfold?

Daryl Byrd

Chris, I don’t want to be too simplistic with this, but actually think it is very simple. It’s really all about client growth, in my commentary, on non-interest bearing deposits obviously we spend pretty fair amount of time kind of thinking about deposit data and what happens is way to move up, but I am worried about it too much, because I think what we've accomplished and what we are doing is we’re moving new clients into the bank and those new clients bring their all working capital cost.

And if you’ve been in this business, I hate to say but I’ve been in it very too long, but and your companies, you have a certain amount of operating float that they run. And if you move that client to your bank that's going to come and that creates typically non-interest bearing deposits.

And we've done a nice job of growing back, it doesn’t give us a lot of value right now, but I think over the next two years, as we see rates move I don’t think all of us know rates are going to go up, those deposits are going to be very impactful to our earnings swing. But it really, whether it’s Michael’s middle market commercial teams or C&I group that we've been pretty good at for a long time or now as Bob, kind of introduces a new level up to us in terms of our small business capability. And kind of growth on our consumer business, I think we are going to continue to see that being in the right direction and pretty confident on that.

Chris Marinac - FIG Partners

Great. Thanks. And I guess my follow-ups had to be continued evaluation and progress this quarter on return on tangible common presumably that’s just a little bit higher next quarter or is there a step up on their launch as you’ve been saying. What does that mean for your decision to adopt new projects for those acquisition or discontinued organic growth? I mean do you see that as kind of a minimum level as current prices that you are achieving on returns?

Daryl Byrd

You know Chris, interesting thing is over the last looks like two years we’ve made a fairly significant investment from a risk management perspective in our company in trying to make sure we were solid in a lot of areas we continue grow. One effort has been a (inaudible) project that we’ve had ongoing and we’ve been very focused on that and frankly it’s a pretty good learning experience for us in terms of what businesses are contributing and creating value and some that maybe aren’t. And I think what you have seen is we’ve kind of gone through some of expense initiatives. And really I would like to thank you have seen this for a long time in our company as when we see something that we don’t think contributes will make a tough call and we try to focus on things that we think create the right kind of shareholder value, certainly client value, but shareholder value. And we are still petty focused on that. Randy any though or Anthony any thoughts there.

Randy Bryan

I think it’s a good point Joe, I think the steps we’ve taken over the last year plus really just to have build on the company’s historical view of how we look at those opportunities. I think we’ve got some additional tools and some additional things to help us find that and I think whether just looking at on a risk adjusted basis the return of similar acquisition or additional investments in the market I think will be continuing to just move around that to get those risk adjusted returns to continue to improve overtime.

Anthony Restel

And so Chris the last thing, I have kind of follow up. If we you have some long terms strategic targets that we announced sometime ago. So those employees and so clearly to make those following names, will it be making progress. So it’s probably another way that you expect to see kind of continuous improvement as we methodically work our away though the next couple of years.

Chris Marinac - FIG Partners

Very good, thank you all for the color, I appreciated.

Operator

And we will go to Peyton Green’s line with Sterne Agee. Please go ahead.

Peyton Green - Sterne Agee

Yes, good morning. John, maybe a question on the mortgage side. Just trying to understand a little bit about the variability given the potential change in revenue. If you have 20% drop in day notes sale or just revenue in the mortgage side that you report, what do you think expenses will do in the fourth quarter?

John Davis

Peyton, I had to say that it’s hard, but just going to depend or whether it’s on a commission base, volume driven or whether it’s margin driven. I will give you an example. Production goes down you can adjust staffing for production loss, if margin goes down it’s much more difficult to adjust staffing, because it’s not a production and number of ways selling through the system. So it really depends on which direction that revenue outcomes. But we also and the industry was, you saw a compression of both, in the third quarter you saw a margin compression and you saw our volumes going down.

Peyton Green - Sterne Agee

Yeah. I guess, I am just trying to understand because maybe certainly sold more volume in the third quarter than you have really originated. And you can only do that so many times before it touches up. I guess my thought is in the fourth quarter was seasonality, but you kind of set up for a weaker comp I guess. I'm just trying to understand if there is any expense leverage there that maybe didn't show up in the third quarter?

Michael Brown

Peyton, we've got, we’ll certainly continue to be very focus on expenses in the mortgage group, but also I think as John mentioned, we continue to develop our origination capabilities. We are very excited about taxes paying we're bringing onboard. And so we're going to continue to focus on originations and through the cycle we've had a much stronger new account purchase money origination capability than most and we think that will stand us well going forward. John?

John Davis

Yeah another thing I’d just mention too is, I think in the third quarter we incurred some costs associated with closing three mortgage locations. We have significantly reduced staffing by those volume reductions. You really didn't see much of a benefit of our expense reduction in the third quarter, that's a fourth quarter element. So just keep in mind, the finding of this is, it's not all immediate in a way that process works.

Peyton Green - Sterne Agee

Sure. And then I guess on the overall expense side issue, an initiative in general, I mean I kind of step back and think about think you have incurred charges of about $46 million to kind of get out of say basically a flat adjusted expense base, maybe the expenses before the charges based on slide eight in your deck. And they are roughly flat year-over-year with the only adjustment really being about $1.1 million in the unfunded commitment expense that would have gone through the other non-interest expense. But I mean thinking about it kind of with the asset growth that you had, I mean essentially your non-interest expense is about 3.25 of average assets a year ago, it's 327 in the current quarter. How should we think about that as you grow volume going forward, I mean is that just going to be a constant level I guess with the $46 million split we really haven't seen any move down?

John Davis

So Peyton, a couple of quick things, the $32 million that I had applied to the IA impairment we did in the first quarter so when you go on a $46 million number if we back that out, we got a number much lower than that, most of that size branches are closure cost and personnel reductions related to severance. What I'll tell you is I think when you look at the run rate from an operating basis clearly that number is coming down then as we kind of gave you our expectation. I think what you’re going to see we kind of move forward is a fairly contained expense environment. And as we’ve discussed the size of equation and efficiency we’ll be making progress on one time, with containment on the other. And I think kind of previous numbers move and as you hope to.

Peyton Green - Sterne Agee

Okay. So I guess I mean what you’re really saying is both the adjusted rate in the third quarter was too high relative to where it will be based on all the moves that you've made over the past 9 months and expected to go lower and able to get a return on the $20 million in charges ex the indemnification asset issues?

Anthony Restel

Yeah. I indicated it on various questions when I always expect that the expense level is going to be down in the fourth quarter, so yes.

Peyton Green - Sterne Agee

Okay. But I mean I guess kind of conceptually thinking going forward I mean is there any kind of target to asset growth I mean if you grow assets 6% or 10% going forward I mean would you hope to achieve a marginal expense rate of 2% on assets or 1.5% or what’s the right way to think about that in terms of how you’re thinking about investments and spending money to grow revenue?

Michael Brown

You know, Peyton I don’t know that we're going to give you exact numbers on this, but what we have, let’s say invested not only in new businesses and new markets, but as I indicated, we've made some pretty significant investments from a risk management perspective. And we would expect to see some scale advantage as we continue to grow. So kind of what we build should hold us for a while from a scale perspective and would expect to see a fairly reasonable advantage as we grow.

And again we got to kind of think about these new businesses, their top-line growth is going to continue and we think we’re headed in a very good direction in all three of the new businesses that we've been working at over the last couple of years. Anthony any other points there?

Anthony Restel

No.

Peyton Green - Sterne Agee

Okay, great. Thank you.

Michael Brown

You’re welcome.

Operator

And we have a question from line of Stephen Scouten representing KBW. Please go ahead.

Stephen Scouten - KBW

Yeah, thanks guys. Most of my questions have been asked, but a quick follow-up on the mortgage composition. Are you guys seeing any shift in regards to the variable rate versus fixed rate originations? And has that changed to any degree the amount of loans you would hold on your balance sheet?

John Davis

This is John Davis. I don’t see that changed dramatically, it changed a little bit, but not much at this stage. So no I don’t think it’s really had a material impact.

Stephen Scouten - KBW

Okay, great. And then just touching on other capital deployment opportunities from a lot of other companies working on their M&A discussions maybe you are slowing somewhat or been a little less active this quarter. Did you guys have any color in regards to that or are you continuing to have maybe the same level or even increased level of the discussion with potential partners?

Michael Brown

I think we’ve said it pretty consistently for a while, we would expect to see fairly significant consolidation at our business over the next couple of years. And John I would, I think my comment would be as we see a pretty steady kind of activity as well of inbound calling.

John Davis

Yes. I would say it’s really more (inaudible) both inbound and outbound calling I think it’s been pretty steady and to say I would agree with you I don’t think we have seen a number of folks who are looking at the industry and the changes that they have been putting through and that’s structural change within the industry, but also what’s happening, be it on regulatory side or interest rates or whatever it’d be, a number of different items are really causing that interest level and saying maybe helpful to find a partner who can help through this cycle.

We’re an excellent choice. We think we are pretty uniquely positioned into the Southeast. We have a very unique business model. Our team I think is well horsed throughout the region. And I think again we are just in a very unique position. So yes, I would say that we’re going slowdown in activity as these discussions are concerned.

Stephen Scouten - KBW

Okay, great. Thank you, guys.

Michael Brown

You’re welcome.

Operator

And we’ll go to line of Michael Rose with Raymond James. Please go ahead.

Michael Rose - Raymond James

Hey guys my questions have actually been asked and answered.

Operator

I will turn the call back over to Mr. Davis for closing remarks.

John Davis

Look, we really appreciate everybody joining us on the call this morning and very much appreciate your confidence in our organization. And I hope everybody has a great day and a good week. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and using the AT&T Executive Teleconference. You may now disconnect.

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