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IBERIABANK Corporation (NASDAQ:IBKC)

Q1 2014 Earnings Conference Call

April 24, 2014 09:30 ET

Executives

John Davis - Senior Executive Vice President, Investor Relations

Daryl Byrd - President and Chief Executive Officer

Anthony Restel - Chief Financial Officer

Bob Kottler - Director, Retail and Small Business

Michael Brown - Vice Chairman and Chief Operating Officer

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

Analysts

Peyton Green - Sterne Agee

Christopher Marinac - FIG Partners

Matt Olney - Stephens

Andy Stapp - Merion Capital Group

Michael Rose - Raymond James

Ebrahim Poonawala - Bank of America-Merrill Lynch

Jennifer Demba - SunTrust

Emlen Harmon - Jefferies

Catherine Mealor - KBW

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the IBERIABANK Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

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

John Davis - Senior Executive Vice President, Investor Relations

Good morning, and thanks for joining us today for this conference call. Joining me on the call this morning is Daryl Byrd, our President and CEO who will cover the majority of the prepared remarks and Anthony Restel, our Chief Financial Officer. The rest of our team is available for the Q&A session of the call.

If you have not already obtained a copy of our press release and supplemental PowerPoint presentation, you may access those documents from our website at www.iberiabank.com under Investor Relations. A replay of this call will be available until midnight on May 1. Information regarding that replay is provided in the press release.

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

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

Daryl Byrd - President and Chief Executive Officer

John thanks and good morning everyone. As we communicated in our last earnings conference call, the first quarter of each year is typically impacted by seasonal influences such as fewer days, seasonal slowness in our residential mortgage and title businesses and expense resets that we start at the beginning of each year. We also experienced some cyclical softness in the mortgage and title businesses as well as softness in our capital markets business as the investment banking side got off to a slow start with four fewer investment banking transactions, then a busy fourth quarter.

Finally, we were impacted by the unusually cold winter across some of our markets. While these negative factors influenced our financial results, we consider many of them temporary and most were expected. Other factors were better than expected such as our margin strength and our net interest income. The financial results for the quarter exceeded our forecast and budget and the results don’t materially change our operating EPS forecast for the full year of 2014, which remains close to the average of analyst estimates.

We continue to have organic loan growth. Our organic loan growth was $165 million or 8% annualized growth for the quarter. This rate of growth was actually less seasonally influenced than usual for us and suggests our geographical dispersion is offsetting the typical first quarter slowness we experienced in South Louisiana. We had nice loan growth in our Florida markets and we also saw nice growth in our consumer and small business originations in much of our footprint.

Our net interest margin and net interest income improved on a linked quarter basis. The net interest margin improvement of 2 basis points was driven primarily by our progress reducing deposit cost and the continued growth in non-interest bearing deposits. The margin improvement combined with a $234 million growth in average earning assets resulted in net interest income growth of about $1 million or 1%.

Our stellar credit results improved significantly during the quarter. Our legacy non-performing assets declined 19% during the quarter and dropped to 49 basis points on total assets. Similarly, legacy loans past due dropped by one-third and legacy classified assets declined 28% during the quarter. Finally, net charge-offs dropped to 3 basis points on average loans and has averaged only 5 basis points over the last nine quarters. We continue to make progress in our covered portfolio, which I will ask Anthony to talk about in a few minutes.

In the first quarter, we had $1.8 million in pre-tax non-operating expenses that were primarily merger-related or about $0.04 per share on an after-tax basis. We also had $1.5 million in tax free BOLI proceeds or about $0.05 a share on an after-tax basis in the first quarter in addition to another $0.01 per share in our other non-operating income. On an operating basis, non-interest income was down $4.8 million compared to last quarter. The primary drivers were a $2.2 million decline in residential mortgage income. Capital markets income was off approximately $1 million and service charge income was down approximately $500,000.

Operating non-interest expense increased $3.2 million or 3%. A component of that increase was $1.8 million increase in payroll taxes, which is seasonally influenced and Anthony will discuss this topic in NSF income shortly. In addition, we had $1.2 million increase in marketing and business development expenses on a linked quarter basis which were primary expenses for direct mail campaigns and CRA initiatives that were budgeted for the beginning of the year. We also had $1.2 million of additional provision for unfunded commitments. Finally, our FDIC insurance was up approximately $600,000 caused by a change in our relative funding composition compared to last quarter. I want to pause and note the loss of days in the first quarter come back in the second quarter and thankfully across our markets spring is here, so weather should not be an issue.

Our residential mortgage lot pipeline has climbed by $80 million or 73% from year end. We also expect to be favorably impacted by our strong purchase money orientation. And our mortgage group is very focused on their expense structure. Another positive since quarter end is our capital markets business experiencing a pickup. We have been involved in one investment banking transaction since quarter end and the daily commission business in April is the highest month that we have experienced this year.

Today, I would like to talk a little bit about unique positives impacting our markets, our growth and our future net income. First, we are excited about the synergies and growth dynamics of our recent merger announcements and Teche transaction we anticipate we will achieve our targeted efficiencies of greater than 50% of expenses. We continue to be excited about our team in Dallas and our growth prospects in that market. This quarter we saw a nice loan growth contribution from our Florida franchise. Our markets in Florida are steadily improving and our teams there are contributing nicely. We expect Florida to be a growth story for our franchise over the next few years.

I am also excited about the growth of our consumer and small business franchises. As we have discussed in the past we like the more granular nature of these businesses and the diversification of these loans and deposits provide to us. Our legacy Louisiana markets are doing very well economically. In particular, New Orleans was recently named America’s fastest growing city. As New Orleans approaches its tri-centennial in 2018, we see incredible change in the face of Downtown, New Orleans that is driven by redevelopment and the addition of two multi billion dollar hospital complexes.

Another market that is exhibiting explosive growth is the Lake Charles metro area. The Lake Charles MSA has a population of about 200,000 people with total private employment of about 79,000 jobs. Over the next six years that market will experience $65 billion in new capital expenditures driven by over 40 significant projects in petrochemical infrastructure and other construction activity. These investments are projected to create a need for approximately 30,000 temporary construction jobs and approximately 7,000 permanent jobs. Many of these employment opportunities will be well paying jobs. With one of the most comprehensive distribution systems and the third largest deposit market share in that market, we believe our merger with Cameron State places us in a unique and excellent position to take advantage of the growth of this market.

As I mentioned earlier we are very focused on the expense structure in our residential mortgage business. In addition, we continue to evaluate our expense structure though out the organization and you should expect significant progress in our becoming more productive over the next several quarters. We believe we are well positioned to take advantage of the consolidation in our industry and continue to see a healthy amount of M&A activity. Finally, we want to remind you of the strategic initiatives and our pay for performance initiatives announced in the last call. We believe our risk adjusted returns for shareholders have been exceptional. As always I want to thank all of our associates for their hard work and dedication to organization. John?

John Davis - Senior Executive Vice President, Investor Relations

Thanks Daryl. My remarks will focus on an update regarding the pending acquisitions and a quick explanation how our first quarter results differed from the sell side community’s projections. As outlined on Slide 19 of the PowerPoint presentation the Teche transaction Louisiana is progressing very well. We have received all regulatory approvals and no divestiture will be required which is a positive. Last week the SEC declared the proxy statement prospectus effective and the shareholder meeting is scheduled for May 28 with an anticipated closing date on May 31 pending their approval.

We expect the branch and systems conversions to be completed by the end of the second quarter. We are still comfortable with our projected greater than 50% cost savings of pre-merger expenses. The First Private transaction in Dallas was announced about month later than Teche and is tracking that other transaction’s path accordingly. We filed applications with the regulatory agencies and the proxy statement prospectus with the SEC. We anticipate closing the First Private transaction on June 30 pending the approvals of regulators and First Private shareholders.

I will now turn to a quick comparison of our first quarter results to consensus analyst’s expectations. Our margin was 7 basis points above the average analyst’s margin estimate, 9 basis points above the top end of our guidance range. The yield on the FDIC covered loan portfolio net of the loss share receivable was less than we projected during our last earnings conference call, but the average balances were higher than projected, resulting in the covered loan income being about $400,000 better than our expectations.

We are projecting the FDIC portfolio income to decline $1.3 million in the second quarter and we will provide slightly less income for the full year of 2014 than we previously projected as a result of lower covered yields, partially offset by higher covered loan volumes. It appears we were slightly below average analyst expectations on average earnings asset volume in the first quarter, but the better margin resulted in net interest income that was about $2 million better than average estimates.

The loan loss provision was also better than most analyst projects. Our first quarter provision covered net charge-offs by about 2.5 times. Our non-interest income results were below analyst’s expectations by about $1.5 million, though with the $1.5 million in BOLI proceeds which we consider unexpected in non-operating in nature. We were really about $3 million below analyst’s expectations. I would suspect mortgage income and capital markets were the primary reasons for the variance.

As shown on Slide 13 of the presentation mortgage loan – mortgage loan origination volume was down 22%, mortgage loan sales volumes were down 18% and aggregate gain on sale margins that’s not on the best efforts basis declined 65 basis points on a linked quarter basis. Gains on sale declined $4.1 million, market value adjustments improve $2.3 million and originating and underwriting fees were about $400,000 lower.

Mortgage revenues declined $2.2 million while mortgage commission expense which was included non-interest expense declined $1 million during the quarter. Our mortgage production volumes continue to outpace the industry results as reported by the mortgage bankers association, but that doesn’t mean the cyclical decline that we faced feels any better.

As shown on Slide 14, when taking out the cyclical decline in mortgage activity as measured by the weekly locked pipeline on a common sized starting position basis. You can see that the significant seasonality in the mortgage activity between the fourth, first and second quarters. We saw short but not unusual seasonal declines this winter and we are seeing a steady favorable pickup in seasonal activity this spring. We believe some of our mortgage markets were significantly impacted in a negative way by poor weather conditions. We remain optimistic that we are well positioned as the spring selling season gains steam and general conditions in the mortgage industry continued to improve.

One final comment regarding our mortgage business, we recently announced that Chuck Quick, who has mortgage effort for many years will be retiring. Chuck joined us from the Pulaski acquisition back in 2007 and Chuck is one of our longest tenured people with 43 years of continuous service and that’s truly an amazing feel. We are very proud of the growth and accomplishment under Chuck’s leadership and wish him well. Bill Edwards, formers president of BancorpSouth mortgage and whom Chuck recruited to join us over a year ago has accepted the helm of president of our mortgage shop. Bill along with Daryl Byrd, the services Chief Operating Officer and Michael Brown, Chief Operations officer, providing excellent and experience team to lead us to the challenges and opportunities in the mortgage business.

To wrap up total non-interest expenses increased $5 million on the reported basis and $3 million or 3% on an operating basis. On an operating basis expenses totaled $105.6 million, about $2.5 million worst in the average analyst estimates. As Daryl described and Anthony will described in detail we believe seasonality plays a significant role in certain expense categories, many of which will improve in the remainder of the year.

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

Anthony Restel - Chief Financial Officer

Thanks John. I am going to start today with a quick update of the FDIC portfolio. From the performance perspective the net income on the covered portfolio was above the expectations we outlined in the fourth quarter earnings release by $400,000. The additional income we received during the quarter is a result of $5.1 million from pool closings $1.5 million in recoveries and $700,000 above the cash flow offset by $7 million of additional amortization of the indemnification assets.

At March 31, indemnification asset was $141 million, down $21 million or 13% since year end. From an expectation standpoint, I expect the pace of the FDIC portfolio resolution to remain relatively brisk throughout 2014 and expect the balance of the indemnification asset to decline materially this year. As customary, we have provided updated projections for the portfolio in the supplemental PowerPoint presentation on Slide 43.

I realize there is some deviation from the projections caused by pool closings, but these events are hard to predict and therefore not included in our model. Although we have lamented having way too many pools earlier in the loss share accounting process, it appears to granular pools actually could be a benefit as we exit loss share coverage. Pool closings prevent excess cash flow from remaining trapped for significant periods that could occur if we had only a few pools. We currently have 182 active pools of which 42 pools have a recorded investment of less than $1000. As a reminder we started out with over 600 pools within the covered portfolio.

As a reminder, we are in the final year of our commercial loss share coverage on the Capital South (indiscernible). Our current modeling indicates we have $14 million and remaining balances under the non-single family portfolio to collect from OREO transactions in the FDIC on loss share coverage. Although not completely out of the woods on the FDIC portfolio, I believe we continue to make strong progress towards the successful resolution of these portfolios and related indemnification assets. As Daryl mentioned in his opening remarks we have decided to provide earnings guidance for 2014, the primary driver behind providing this guidance to help narrow the range of Street expectations and to provide more clarity on how we currently forecast full year 2014 results.

Specifically we noticed that our yearly expectations were in line with the full year average analyst’s estimates. However, we had some meaningful differences when you stepped down to the quarterly level. I believe that some of the quarterly deviation is a result of unclear influence seasonal patterns have in our company. Before I get into some detail on the forecast I want to spend a little time talking in detail about the seasonal influence that impacted the first quarter. I mean start let’s with payroll taxes and retirement contributions, which were $5 million in the first quarter, up $2.2 million and $2.8 million in the fourth quarter. Using 2013 actual trending, I expect to see this expense drop by $1 million in the second quarter then drop by an additional $1 million in the third quarter and finally drop an additional $400,000 in the fourth quarter. We will then start back over in the first quarter of ‘15.

We have included a graph in the supplemental PowerPoint presentation to highlight this for your review on Slide 16. We also see seasonal patterns related to NSF charges as well. Slide 17, in the supplemental PowerPoint shows the trending for NSF charges over the last five quarters. Also as Daryl mentioned in his remarks earlier, two less business days impacted the first quarter by $1.9 million. As we head into the second quarter we regain a day and then pick up another day in the third quarter. So these three items alone excluding any other changes will favorably influence earnings by $2 million in the second quarter and then an additional $2.5 million in the third quarter. The reason I wanted to spend some time on this particular issues to show the magnitude of seasonal influence in quarterly day count as in our P&L.

Now to make it even more interesting there on top of these three items the impact of our seasonal businesses which are predominantly strongest in the second and third quarter. I think these items clearly demonstrate how we will have significant swings between the quarters and that excludes any balance sheet growth. Also keep in mind that as the Bank’s earnings continue to grow and the absolute size of the organization grows, these seasonal patterns will likely become more pronounced given our low share count.

Switching back to the guidance, we are conforming that our current forecast indicates 2014 operating EPS is in line with the average analyst’s expectations based on the models we have of $3.65. We also believe that the margins for the full year will be between 3.45% and 3.5%. This range is up 5 basis points from where our previous forecast indicated. And finally, we expect the efficiency ratio adjusted for non-operating expenses for the remainder of the year will be 68%. The following major assumptions are embedded within the current forecast.

Current forward curve projection on interest rates no significant change in credit quality, the announced acquisitions close as expected and the marks and one-time charges are consistent with previously announced metrics and our mortgage and title projections have been updated to reflect the current environment. Like all forecast, things will change and evolve through the year, like last year we will change and adapt as things evolves throughout the remainder of the year. It goes without saying that we will remain laser focused on expenses and revenue opportunities. We will provide updates to the forecast as things change materially.

Now I will turn the call back over to Daryl.

Daryl Byrd - President and Chief Executive Officer

Anthony thanks. Before opening the call for questions I want to mention that we have hired a new executive to run our treasury management or cash management fee businesses across our franchise. We are excited that Donna Kasmiersky joined us from BBVA Compass, where she was their National Sales Manager located in Dallas. Several of us have known Donna from a prior life for maybe more years that we want to admit. I am excited about the energy and knowledge Donna brings to this important fee income business. We expect to see significant growth in this area over the next several years. Donna will office in Dallas and we welcome her to our organization.

Robert, I’ll now open the call for questions

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll go to the line of Peyton Green from Sterne Agee. Please go ahead.

Peyton Green - Sterne Agee

Hi, yes, good morning. Daryl, I was just wondering a year ago give or take you all outlined the magnitude of efficiency initiatives that you’re undertaking and some revenue initiatives. Would you describe your reference to that in the call – in your prepared comments? Is this more evolutionary type changes or would there be some revolutionary component to that? Thanks.

Daryl Byrd

Peyton evolution versus revolution, I am not sure exactly which direction to go with that. What I would comment is I think Anthony said it best. We remain laser-focused like expenses and continue to work that in a sincere fashion such that we improve the productivity of the company over the coming year. I’ll also remind you as we talk about the efficiency ratio there are two sides of that. And we’re extremely focused on the revenue side as well and have a number of initiatives going on there to improve that side of the equation. Also we expect to see the company, the company will come a larger company particularly as we integrate the acquisitions we’ve announced so that’s certain efficiencies that we pickup there that we’re pretty excited about. Anthony, John any other comments?

Anthony Restel

Peyton I guess it’s best to say we’re extraordinarily focused and we kind of like to do what we say we’re going to do.

Peyton Green - Sterne Agee

Okay, great. Thank you.

Operator

Next we’ll go to the line of Christopher Marinac from FIG Partners.

Christopher Marinac - FIG Partners

Thanks. Good morning. Daryl, we’ve heard a lot of companies in recent days or weeks on calls. They’re discussing sort of the increased loan demands over from replacing inventory and getting rid of obsolescence and things of that nature. Do you see any of that or is there something continued different that is driving the loan production in the markets?

Daryl Byrd

Chris, as is historic for us we’ve done a good job in our markets by having the right people the right themes and traditionally taking share. I would say that your comment about the development of markets I guess that the easy one for me to describe would be Florida. We see Florida coming back and improving and we’re now beginning to see opportunities there from a growth perspective better indicative of the economic improvement in that market. And so I think that would track some of what you’re commenting on. And I think you’re right some of the reading I do you’re beginning to see line utilization going up for companies as people are becoming more confident in this recovery. Michael, any thoughts?

Michael Brown

Yes, I mean so if you go back a year or two it’s fairly clear that the growth we’re seeing was coming from the redistribution of share from other institutions. That still is the largest component I would suggest of the growth that we’re seeing as a company, but we’re seeing our existing clients do more in terms of spending on equipment and facilities and they’re seeing working capital needs increase. I wouldn’t suggest that, that’s a dramatic change but certainly it’s more of a positive direction than it has been in the past. But again it’s a bulk of the growth we’re seeing were taken from others.

Christopher Marinac - FIG Partners

Okay, great. And just a follow up I guess on deposits I was just curious if you think there’s any changing in terms of pricing as this year develops?

Daryl Byrd

Anthony?

Anthony Restel

First we obviously as a company we’ve got some pretty significant expectations for loan growth. Deposit pricing hasn’t materially moved up. I can’t opine on where I think it’s going to go during the year. We’ve been able to grow our non-interest pretty successfully over the last couple of quarters, don’t expect that to stop and we do expect to be able to grow deposits without having to get carried away on the interest rate.

Christopher Marinac - FIG Partners

And we have made a lot of progress in deposit costs?

Anthony Restel

Yes. And again, it’s going to come down to competitive environment. We are not seeing anything today that gives us tremendous concern or the deposit pricing is going to get out of hand during the year.

Christopher Marinac - FIG Partners

Okay, great. Thanks for taking the questions.

Operator

Next we’ll go to the line of Matt Olney from Stephens. Please go ahead.

Matt Olney - Stephens

Thanks. Good morning guys.

Daryl Byrd

Good morning, Matt.

Matt Olney - Stephens

Hey, going back to the margin, can you talk more about the yields you are getting on new loan originations in the first quarter and how this has changed over the last few months?

Daryl Byrd

Michael?

Michael Brown

Yes, I am sorry. We have seen I think I mentioned to you in the last – on the fourth quarter conference call. We are seeing increased competition from a lending perspective. It’s very clear that all institutions are back and certainly more aggressive than they have been historically. There are outliers in individual situations that will ignore where margin or credit spreads are significantly tighter than maybe are reasonable. But I would suggest that we are probably up about 25 to 50 basis points on a credit spread basis for a good credit versus where we were sort of the less aggressive times. We are seeing also more aggression around structure, more people moving to limited or non-recourse, higher loan to values. I think that, that’s just a function of again more aggressive players entering the marketplace and looking for loan growth.

Anthony Restel

Hey, Matt. One other thing, not to interrupt with, you also have some mix shifting going on. So, as Bob’s small business stuff kind of comes along, if you look at Slide 27, you’ll see that small business as a percentage of the pie continues to kind of eat into the overall mix and those loans do carry higher yields.

Matt Olney - Stephens

Okay, that’s helpful. Thank you. And then going back to the outlook on expenses, Daryl, you mentioned that you are laser focused on the expenses going forward. Are you still implementing new initiatives on that front or you are just trying to refine kind of what you did in 2013?

Daryl Byrd

No, Matt, absolutely, we have new initiatives that we have in place that we are executing on. We are not getting a lot of detail on that today, but we certainly have them and that’s part of what gives us confidence in our progress.

Matt Olney - Stephens

And thinking about the seasonality, do you think it’s reasonable we could see expenses decrease from the core operating – the core expense number on 1Q?

Daryl Byrd

Anthony?

Anthony Restel

Yes, Matt, what I will tell you is we certainly have some things that will be coming down, payroll taxes and I would tell you though as I think about the second quarter, we also are going to have some things going the other way, right. So commissions as the mortgage business picks up. Jeff’s business is doing really well, might see some more commission income out of those businesses and then we will give…

Daryl Byrd

You will also see significant income come out.

Anthony Restel

No, no. So we are just talking expenses right here. So we will also have the impact of one month of the franchise in the financial statements. With all that said, our goal here is to really campaign expenses and see what we can do to kind of maintain and bring them down knowing that the seasonal impact that also will impact the revenues going up could push the expenses a little bit higher as we see those, but our main goal is try to hold the line on expenses and really grow the revenue stream. And then, as Daryl mentioned, you select initiatives to try to keep happen that expense number down.

Matt Olney - Stephens

Thank you.

Operator

Next, we’ll go to the line of Andy Stapp from Merion Capital Group. Please go ahead.

Andy Stapp - Merion Capital Group

Good morning.

Daryl Byrd

Good morning, Andy.

Andy Stapp - Merion Capital Group

Well, what should we expect regarding marketing and business development expense? Is Q4 a better run rate?

Daryl Byrd

Anthony?

Anthony Restel

Andy, what I would tell you is, as if I were modeling that I’d probably hold it relatively flat.

Andy Stapp - Merion Capital Group

Okay.

Anthony Restel

With the first quarter run-rate.

Andy Stapp - Merion Capital Group

Okay. And roughly what percentage of assets that are scheduled to lose all share coverage within the next 12 months, do you expect to resolve within this timeframe?

Anthony Restel

I am going to answer the question, Andy, a little bit differently, right. So, we clearly I think the question is that out of the credits that we think we have losses on, right, or the problem credits impaired within the portfolio, how do we feel about our ability to resolve those credits and collect the money either from the FDIC or how we are going to get it in a timely fashion?

Anthony Restel

We have been extremely focused on that. I will tell you that you go back to a charge in the first quarter last year we had some credits we knew we wouldn’t be able to collect. And so we have managed this process now looking at the credits and resolution for two years. We feel really good about, I am not saying it’s not going to be 100%, but we feel really good. We are going to be able to collect all we need to collect. If you look at the balances in the portfolio, it will come down a little bit and we are going to start to tail off and then be relatively flat and have a reasonable amount of balances left in this portfolio. That excludes the problem loans that we just talked about.

Daryl Byrd

And Andy, you have to remember that the markets improving in Florida, where many of these assets are located.

Andy Stapp - Merion Capital Group

Got it. And other non-interest income has been down for the last couple of quarters or just down from the last couple of quarters, anything unusual there or is Q1 a good run rate?

Anthony Restel

I think that….

Daryl Byrd

We have the seasonal influences coming back up, right.

Anthony Restel

So outside of the seasonal stuff that we have talked about, the title…

Andy Stapp - Merion Capital Group

Yes. I was talking about the last line item, the…..

Anthony Restel

Yes, you should be good on the last line item.

Andy Stapp - Merion Capital Group

Okay. And I will hop back into the queue. Thanks.

Anthony Restel

Okay. We also had BOLI in there correct and we also had the swap income. Some of those are going to be somewhat volatile quarter-to-quarter.

Daryl Byrd

Next question?

Operator

We will go to the line of Michael Rose from Raymond James. Please go ahead.

Michael Rose - Raymond James

Hey, good morning guys. How are you?

Daryl Byrd

Hi, Michael. How are you doing?

Michael Rose - Raymond James

Good. Hey, just wanted to ask about the seasonal impact of NSFP. I think NSFPs were about 11% of your fee income this quarter and you expect a seasonal rebound. We have heard from several other banks that given the improvement in the health of the consumer and their balance sheet that they are not seeing as much in the way of NSF fees. How do you think about the rebound there and what would have growth potentially offset some of that impact? Thanks.

Daryl Byrd

Anthony or Bob, do you all want to?

Anthony Restel

Mike, I will tell you the way I kind of think about it. I think the first quarter obviously has impacted number of days. Our consumers start to collect their refunds from the government, which puts a little bit of pressure on second quarter. And we move back into, I’ll call it the spending season with school and the holidays and as such. So I think there could be – the economy improvement maybe less NSF charges overall, but we continue to grow our account base. And so on a net-net basis, I would think the pattern that we show you on Page 17, I think what will play out again. Bob, do you?

Bob Kottler

Yes. I mean, I think in first quarter you saw couple of things. You saw people, economy getting better. So people having more money in their account reflected in average balances. You also saw tax returns coming in earlier, so that we saw and when people get their tax returns, they have less NSFs for a period of time until we spend that money. And you also saw some weather related in some of our core markets where people couldn’t shop for some period of time, which also takes it down. So, I think we will see a rebound in future quarters. We won’t have some of those effects.

Michael Rose - Raymond James

Okay, that’s helpful. And just as a follow-up, it looks like the commercial loan pipeline was up about $200 million quarter-to-quarter, where primarily was that growth and was that growth in the pipeline more from existing customers or new business? Thanks.

Daryl Byrd

Michael?

Michael Brown

Yes, no problem. So the commercial growth that we are seeing in first quarter certainly came from Houston, which has been a pretty consistent provider for us in terms of commercial growth. And as Daryl noted, we saw actually very good growth in Florida and that’s a functional reflection of the fact that we have made investments in that market over time. And we have also seen a recovery take place with respect to the markets we are in, in Florida. Louisiana, Louisiana excuse me was soft, as it typically is in the first quarter. That’s obviously our largest overall stake. And then we had consistent growth in a couple of other markets. As you kind of look through the pipeline going forward basically we will see a request in first quarter in terms of the large part of the pipeline would be Texas and Florida, but you would also see a significant contribution coming from the Louisiana as the markets start to get out over that first quarter low that they tend to get into. So my point would be is pretty much across the board. In terms of new activity versus shifting share sort of fits with the comps I described earlier. We are seeing greater new activity across the franchise, but in certain markets like Florida it is just simply moving market share from one institution to another.

Again generally very active and just again another point of reinforcement, the first quarter is always our slower quarter. It was more pronounced this quarter I think as much as anything because the fourth quarter was the strongest we have ever had. And there was a significant amount of closing activity towards the end of December which effectively shifted share in essence from first quarter to fourth, so very positive about the outlook. As Anthony noted we are getting activity from broader businesses than just simply commercial business banking activities picking up. Consumer activity we are moving into the more traditionally active second and third quarters. And that ties in with the marketing expense increase that we saw in the first quarter. A large part of that was tied to the campaigns that we normally run in the second and third quarter. So we should see the traditional rebound to occur. And again it should be fairly broad based not just specific to one or two markets as it was in the first quarter.

Michael Rose - Raymond James

Great. Thanks for taking my questions.

Operator

And we will go to the line of Ebrahim Poonawala from Bank of America-Merrill Lynch.

Daryl Byrd

Ebrahim, good morning.

Operator

(Operator Instructions) And I will go ahead and open the first like again. Are you there?

Ebrahim Poonawala - Bank of America-Merrill Lynch

I am here.

Operator

Okay go ahead.

Ebrahim Poonawala - Bank of America-Merrill Lynch

Hey guys, good morning. Sorry about that.

Daryl Byrd

Good morning.

Ebrahim Poonawala - Bank of America-Merrill Lynch

So Daryl just going back to full year ‘14 EPS guidance and I am going back to this because in terms of U.S. there is a lot of seasonal sort of ins and outs this quarter, we are going to have deal impact and in the second quarter and some of the efficiency initiatives that you are working on, when we look out expectations for loan growth picking up cost shares coming out, what’s the – if you can sort of help us think about the upside or the downside risk of $365 number because it does imply a meaningful sort of ramp up from year and that will be helpful?

Anthony Restel

Ebrahim, its Anthony and I will tell this obviously we have got loan growth and deposit growth built into that. I would tell you that looking at our historical trends being able to produce double digit loan growth. I am not too worried about our ability.

Daryl Byrd

We feel pretty good about that.

Anthony Restel

We are not worried about ability to produce loans. I think that we have got to a point on some of the seasonal businesses that I personally feel like we have hit the bottom. With that being said, we know this is an evolving market for those industries. What I will tell you though just like we did last year our forecast and the things we do in the bank will evolve through the year and we will do what we need to do to get to where we need to get. So there is a revenue component and I think we have initiated a lot of stuff last year that’s coming through and as expected and will really benefit as we get into the later half of this year. I think I feel pretty good if you had to pin me down and say what’s the greatest thing that worries you is it that we get more of a seasonal declines or cyclical decline out of those real estate related businesses. But keep in mind that if that happens obviously we are going to pivot and make adjustments on the expense side as well, so that would be if I had to give you one that’s what I will give you. Daryl you would…

Daryl Byrd

Ebrahim one of my comments is I think you have got a shortage of housing in a lot of markets, so I think we are going to see a pickup from residential mortgage perspective as we begin to bring new housing online that’s not going to be the same as the refi markets that we saw hopefully the last several years. But I think it’s – I think we are going to see a good rebound. I think most major cities saw if you kind of look around a lot of the different markets that we operate in, you have actually got housing shortages that have occurred. So I feel like there is upside there from a purchase orientation on the residential mortgage side that could play favorably to us.

Ebrahim Poonawala - Bank of America-Merrill Lynch

Got it. Thank you very much. And then just some clarity on the efficiency ratio we expect the full year ’14 number to be 68% or we expect to be 68% at some point in 2014?

Daryl Byrd

Anthony?

Anthony Restel

We expect the efficiency ratio when you look at the second, third and fourth quarters to be 68%.

Ebrahim Poonawala - Bank of America-Merrill Lynch

Okay. So the average 68 for the rest of the year?

Daryl Byrd

Yes.

Anthony Restel

That’s correct.

Ebrahim Poonawala - Bank of America-Merrill Lynch

Understood. And if I can sneak a last one in, in terms of – hey on a mortgage earnings when you look at the $10 million, there’s the one point or the 2.3 market value adjustment for the delta. Is $10 million a good run rate to think about when we see in terms of the seasonal pickup next quarter and whether sort of fee line trends into 2Q?

Daryl Byrd

Ebrahim, what I’d tell you is as I promised when I talked to everybody after the first quarter we put a slide on Page 13 and I hope you find that slide helpful and we got to give you the pieces and parts of what’s going on. When you look at the gain on sales, the sales margin and you look at the market value adjustments, those are going to move in opposite directions of each other depending on rate, where rates are at. So I can’t tell you what the market value adjustments going to be because I don’t know what rates are going to do. But ultimately that’s what the hedging is trying to insulate, right. So if you’re losing it on one side you’re going to get it somewhere else and so that the dynamics of the market are going to really drive where that number goes.

Ebrahim Poonawala - Bank of America-Merrill Lynch

Got it. Alright. Thank you very much.

Operator

We’ll go to the line of Jennifer Demba from SunTrust.

Jennifer Demba - SunTrust

Thank you. Good morning.

Daryl Byrd

Good morning, Jennifer.

Jennifer Demba - SunTrust

Thank you for all the information on the seasonal influences. That’s a great detail. My question is regarding the capital markets and wealth management businesses. Daryl, just wondering how those are tracking in the last few quarters versus internal expectations and on the capital market side is your research coverage completely built out now or is there more to go? Thanks.

Daryl Byrd

You know Jennifer I think we’ll start with wealth management which is on a – is moving nicely in the direction that we wanted to go. And we feel pretty good about the growth in that business and our progress there. Clearly from a fourth quarter to first quarter we had a decline in revenues in the capital markets business, but I would comment that we had a fabulous fourth quarter. So you’re coming off a very, very strong quarter and we just didn’t see the investment banking income in the first quarter of the year. So we expect that to rebound, we know that’s going to kind of come and go as the energy business needs capital. But and it’s a business that traditionally has used a lot of capital. So we have a fair amount of confidence that we’ll rebound and we’re already seeing that in April. What’s important is we’re seeing in particular in April we’re seeing nice trading and commission revenue. Jeff I’d ask you to comment in terms of coverage and where you see that going.

Jeff Parker

Sure. Jennifer, we – this is Jeff. We reached a total of 100 companies, I think 101 companies under coverage at the end of the fourth quarter. We recently had two research analysts that both on the E&P side that moved from New Orleans to Houston. We’re changing that out right now in terms of making some additions to our team which I think would be in place in the next week or so. And so at this point quite frankly we have suspended coverage as you know you need to when people move around.

Daryl Byrd

But you expect to have that coverage back.

Jeff Parker

We expect to have that coverage back and then to answer your question we see the opportunity continues to grow our coverage and to grow IBERIA Capital Partners, we still have about 32 or 33 people there. I think you’ll see add some additional capability in terms of research but more on the institutional sales side.

Operator

Do you have any other question Ms. Dempa?

Jennifer Demba - SunTrust

I’m done. Thank you.

Operator

Okay, thank you. And we’ll go to the line of Emlen Harmon from Jefferies. Please go ahead.

Emlen Harmon - Jefferies

Hey good morning guys.

Daryl Byrd

Good morning, Emlen.

Emlen Harmon - Jefferies

Hopping back to just the mortgage revenues, could you guys remind us just kind of how you go about hedging the mortgage income. We hadn’t seen those valuation adjustments I think for a couple of quarters so we’d just be curious to know kind of how you go about affecting that and whether it’s tied to rates principally or there’s kind of another way of thinking about it?

Daryl Byrd

Anthony?

Anthony Restel

Yes Emlen it’s – our hedging is rate driven, that’s our risk in the portfolio. As you recall last year we started the move a little bit more from a best efforts and in this a mandatory delivery, but basically when we’re locking loans and getting those loans close we’re offsetting that by entering into forward (TBA) mortgage instruments so that we can isolate the risk off the balance sheet relative to the time it takes for us to get those mortgages through the pipeline close and sold. So you’re offsetting it with TBA mortgage securities of a similar duration to isolate the risk.

Daryl Byrd

Anthony you would describe our evolution is kind of evolved and become more sophisticated over the last year.

Anthony Restel

It has. Emlen does that help you out with what we’re doing.

Emlen Harmon - Jefferies

It does. Yes I appreciate it. And just going back and looking at the last couple of quarters, it didn’t look like there had been a valuation adjustment the last couple of quarters. Am I wrong in thinking about it that way or have there been something maybe that was buried under the surface?

Anthony Restel

No, I think if you look on Slide 13 you’ll see the market value adjustments are kind of the green shaded mark and you’ll notice that the market value.

Emlen Harmon - Jefferies

Got it.

Anthony Restel

Adjustment is basically moving if you then if you look down at the gain on sale you’ll see that they’re moving opposite of one another. And again if you think about it you book a loan rates that might move up or down which could erode or give you margin on the sale conversely you’re going to either get or lose margin on your TBA purchases. So you’re deciding to move opposite of one another.

Emlen Harmon - Jefferies

Got it. That was it from me. Thanks guys.

Daryl Byrd

Thank you.

Operator

We’ll go to the line of Catherine Mealor from KBW. Please go ahead.

Catherine Mealor - KBW

Good morning everyone.

Daryl Byrd

Good morning, Catherine.

Catherine Mealor - KBW

Maybe one final question on -- is a little bit behind your guidance. Does your higher margin guidance assume that your loan deposit ratio continue to expand like we saw this past quarter; I think it went from 85% to 88%. So shall we see that moving maybe to the 90% range and that will help the margin or do you think this 88% level is a good place to model from here? Thanks.

Anthony Restel

Hi, Catherine I don’t think we’re going to see material move up in the loan to deposit ratio. We could drift up a few basis points from where we are but our goal is not to get up close to 100% or 95% or anything like that, but it could go to 89% or 90% and then back, it will move around up and here a little bit. But we’re not trying to get up to higher levels that maybe were pre-crisis loans.

Catherine Mealor - KBW

Okay, great, helpful. Thank you.

Daryl Byrd

Thank you.

Operator

And we have a follow-up question from Peyton Green from Sterne Agee. Please go ahead.

Peyton Green - Sterne Agee

Yes. Thank you. I was wondering John, maybe you could comment and again thank you for the disclosure on the mortgage business. But I was wondering if you could comment maybe on the contribution to pretax of the mortgage and title business this year in the first quarter and then maybe contrast it to what the contribution was in the fourth quarter and first quarter of last year?

John Davis

Anthony, do you want to take that?

Anthony Restel

Peyton, I don’t have that right in front of me. I know that we’ll have that information disclosed in the 10-Q and I’m going to see if I can pull it up real quick if I fit here. But I don’t have that; I know that’s the contribution it’s going to be down quarter-over-quarter. So I don’t know how many more questions we have here, but I’m going to – if I’m going to take a minute and see if I can get it.

Daryl Byrd

Wait out in the queue.

Peyton Green - Sterne Agee

Well then I’ve got one more then.

Daryl Byrd

Okay.

Peyton Green - Sterne Agee

On the deposit growth which has been very good over the last few years certainly and for the industry and for you all. But with regard to your deposit growth I mean how good do you feel about the stickiness of it; I guess what I am trying to get a sense of is to what degree is it volume growth of existing customers or to what degree is it accounts and balances related to new customers that you think will be stickier than maybe they would have been 10 or 15 years ago?

Daryl Byrd

Peyton, I am strong with that one and look either Michael or Bob Kottler jump in. But a lot of our growth historically has been taking share in our markets and so that’s new clients coming in and with the new clients we get deposit flow that’s going to comes across. So I’d feel really good about the stickiness of those kinds of deposits. Also we’ve changed the mix of the organization pretty significantly away from kind of the high cost CD kind of deposits. So we’ve done a nice job with that from a mix perspective that I think will help us. So I don’t know what the answer that we’re getting across the lag. Anyway we’d feel good about the stickiness of the deposits and feel like we’ll continue to make progress. And in particular the growth of non-interest bearing deposits has been exceptional so we feel pretty good about that. Michael, Bob any comments?

Anthony Restel

Yes. Just a couple of general comments, if you don’t mind, what I would suggest is that as an organization we’ve got a far better profitability reporting in place. So as it relates to the commercial client that we have, they naturally incented our relationship managers and naturally incented to bring in deposit relationships to generate sufficient returns from the overall relationship, not just from credit. And we are seeing good growth with respect to deposits coming in from existing client relationships as well as deposit-only relationships. As Daryl mentioned, we have brought into the team a new manager for our treasury management business. And that’s just a reinforcement of that. And clearly, we have high expectations for the growth, that exists within treasury management that is both pure fee business as well as it will come from deposit growth. So, we feel that it is a very good opportunity there to expand the deposit base naturally within our commercial and business banking clients. As Bob can tell you and I am sure he will, we have seen good growth with respect to business banking from a checking account perspective and then also from consumer accounts as well. So we are adding clients and we are adding deposits with those clients and then we are also adding deposits to our existing client relationships as well. Bob, I don’t know if you want to add?

Bob Kottler

Yes. I mean, if you look on Page 6 of the supplement, you will see we have grown small business checking accounts by 11% year-over-year and 14% on a linked quarter. So we have continued to do very effective business checking account marketing and those accounts had very strong average balances as well as incremental money market and other balances to go with that. So we continue to run campaigns and focus on our incentive plans. Net deposit growth is a part of both our retail and our small business incentive plan. So I think you will continue to see us work through growing that. And those deposits are very granular and pretty sticky. So we will continue to focus on that as well.

Peyton Green - Sterne Agee

And Bob, maybe, I mean what was the balance of the small business deposits for example?

Bob Kottler

They are running well over $10,000 in accounts.

Peyton Green - Sterne Agee

Well, I was thinking just in the aggregate, like as a percent of your deposits?

Bob Kottler

I don’t have the aggregate, but Anthony can maybe get that, but…

Daryl Byrd

Anthony, do you have some other information to come back with?

Anthony Restel

Yes. So, Peyton, going back to your question in the fourth quarter, Bob, the mortgage company had pre-tax pre-allocations of $2.7 million income. That dropped to $700,000 in the first quarter. Lenders title was $400,000 in pre-tax, pre-comp, pre-allocation in the fourth quarter and that dropped to $300,000 in the first quarter.

Peyton Green - Sterne Agee

Okay.

Anthony Restel

I am sorry, I was too busy trying to get the numbers right to hear the question that Bob asked me to do.

Peyton Green - Sterne Agee

So, I was just curious what the aggregate balance of small business deposits was. You referenced 11% year-over-year growth in the slide deck and 14% LQA. I was just curious what the total in the balance was?

Michael Brown

Hi, Peyton, it’s Michael. Our business banking deposits at the end of March ran about $1.7 billion.

Peyton Green - Sterne Agee

Okay, great. Thank you all very much for the color.

Daryl Byrd

Thanks, Peyton.

Operator

And we have a follow-up from Andy Stapp of Merion Capital Group. Please go ahead.

Andy Stapp - Merion Capital Group

Hello, again. Just wondering if the Q1 effective tax rate is a good run-rate for the balance of the year?

Daryl Byrd

Anthony?

Anthony Restel

Yes, Andy, I would use 27.5% to 28%. Obviously, we had some BOLI proceeds which are ex, not tax adjust, don’t have a tax impact. So that brought the rate down a little bit in the first quarter.

Andy Stapp - Merion Capital Group

Great, thanks.

Operator

And at this time, we have no further questions. And I will turn the conference back to Daryl Byrd. Please go ahead sir.

Daryl Byrd - President and Chief Executive Officer

Robert, thank you. I want to thank everybody for listening today and for your conference in our organization. I hope everybody has a fabulous day. Thanks.

Operator

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

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