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IBKC > SEC Filings for IBKC > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for IBERIABANK CORP

Form 10-Q for IBERIABANK CORP


9-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of IBERIABANK Corporation and its wholly owned subsidiaries (collectively, the "Company"), as of September 30, 2012 and December 31, 2011 and for the three- and nine-month periods ended September 30, 2012 and 2011. This discussion should be read in conjunction with the unaudited consolidated financial statements, accompanying footnotes and supplemental financial data included herein.

To the extent that statements in this Report relate to future plans, objectives, financial results or performance of the Company, these statements are deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which are based on management's current information, estimates and assumptions and the current economic environment, are generally identified by the use of the words "plan", "believe", "expect", "intend", "anticipate", "estimate", "project" or similar expressions. The Company's actual strategies and results in future periods may differ materially from those currently expected due to various risks and uncertainties.

Actual results could differ materially because of factors such as the current level of market volatility and the Company's ability to execute its growth strategy, including the availability of future FDIC-assisted failed bank opportunities, unanticipated losses related to the integration of, and refinements to purchase accounting adjustments for, acquired businesses and assets and assumed liabilities in these transactions, adjustments of fair values of acquired assets and assumed liabilities and of deferred taxes in acquisitions, credit risk of the Company's customers, effects of the on-going correction in residential real estate prices and reduced levels of home sales, sufficiency of our allowance for loan losses, changes in interest rates, access to funding sources, reliance on the services of executive management, competition for loans, deposits and investment dollars, reputational risk and social factors, changes in government regulations and legislation, including rules recently jointly proposed by the federal bank regulatory agencies to implement Basel III, increases in FDIC insurance assessments, geographic concentration of the Company's markets and economic conditions in these markets, rapid changes in the financial services industry, dependence on the Company's operational, technological, and organizational systems or infrastructure, hurricanes and other adverse weather events, the volatility and low trading volume of the Company's common stock, and valuation of intangible assets. These and other factors that may cause actual results to differ materially from these forward-looking statements are discussed in the Company's Annual Report on Form 10-K and other filings with the Securities and Exchange Commission (the "SEC"), available at the SEC's website, http://www.sec.gov, and the Company's website, http://www.iberiabank.com, under the heading "Investor Information." All information in this discussion is as of the date of this Report. The Company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations.

The Company offers commercial and retail banking products and services to customers in locations in six states through IBERIABANK. The Company also operates mortgage production offices in 12 states through IBERIABANK's subsidiary, IBERIABANK Mortgage Company ("IMC"), and offers a full line of title insurance and closing services throughout Arkansas and Louisiana through Lenders Title Company ("LTC") and its subsidiaries. IBERIA Capital Partners, LLC ("ICP") provides equity research, institutional sales and trading, and corporate finance services. IB Aircraft Holdings, LLC owns a fractional share of an aircraft used by management of the Company and its subsidiaries. IBERIA Asset Management Inc. ("IAM") provides wealth management and trust services for commercial and private banking clients. IBERIA CDE, LLC is engaged in the purchase of tax credits.

Included in this discussion and analysis are descriptions of the composition, performance, and credit quality of the Company's loan portfolio. The Company has three descriptions of loans that are used to categorize the portfolio into its distinct risks and rewards to consolidated financial statements. "Acquired loans" refer to all loans acquired in a business combination. Because of the loss protection provided by the FDIC, the risks of the loans and foreclosed real estate acquired in the CapitalSouth Bank ("CSB"), Orion Bank ("Orion"), Century Bank ("Century"), and Sterling Bank ("Sterling") acquisitions, which are covered by loss share agreements with the FDIC, are significantly different from those assets not similarly covered. Accordingly, the Company reports loans subject to the loss share agreements as "covered loans" in the information below and loans that are not subject to the loss share agreement as "non-covered loans." The subset of acquired loans that is not subject to loss share agreements are referred to as "non-covered acquired loans." Loans that are neither subject to loss share agreements nor acquired in a business combination are referred to as "legacy loans" or "organic loans."

EXECUTIVE OVERVIEW

During 2011, the Company grew its balance sheet and increased its overall capital position through acquisitions, the opening of new branch locations, and organic growth at many of the Company's existing branches. The Company completed the OMNI BANCSHARES, Inc. ("OMNI") and Cameron Bancshares, Inc. ("Cameron") acquisitions on May 31, 2011 and the Florida Trust Company ("FTC") asset acquisition on June 14, 2011. In addition, the Company increased its small business lending efforts with the addition of personnel experienced in successfully developing and implementing credit programs focused on small businesses. The Company also diversified its revenue stream through expansion of its fee-based businesses, primarily IMC, LTC, and ICP.


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At the end of 2011 and during the first nine months of 2012, the Company's liquidity, both on balance sheet and off balance sheet, continued to be favorable, exhibited by liquidity ratios that exceeded peer levels. Overall, the Company's liquidity position remained strong, its capital ratios were considerably in excess of "well capitalized" from a regulatory perspective and above peer levels, and its primary risk measures remained favorable, all of which allowed the Company to maintain its strategic positioning within the challenging banking environment and provided a strong base from which to continue to grow its balance sheet and increase shareholder value in 2012.

During the third quarter of 2012, the Company completed the acquisition of Florida Gulf Bancorp, Inc. ("Florida Gulf"), the holding company of Florida Gulf Bank, headquartered in Fort Myers, Florida. The acquisition expanded the Company's presence in southwest Florida. The acquisition was consummated after the close of business on July 31, 2012.

A summary of the major categories of assets acquired and liabilities assumed (all recorded at fair value at the time of acquisition), as well as the goodwill created, in the Florida Gulf acquisition is shown in the following table.

(Dollars in thousands)

                     Assets
                     Cash                           $  37,050
                     Investment securities             56,841
                     Loans                            215,706
                     Other real estate owned              554
                     Core deposit intangible               -
                     Goodwill                          29,052
                     Other assets                      31,236

                     Total Assets                   $ 370,439

                     Liabilities
                     Interest-bearing deposits      $ 228,455
                     Noninterest-bearing deposits      57,578
                     Borrowings                        40,277
                     Other liabilities                    351

                     Total Liabilities              $ 326,611

As part of the Florida Gulf acquisition, the Company issued 754,334 shares of its common stock during the third quarter of 2012, resulting in additional equity of $37.2 million. Other equity considerations included the issuance of stock options to purchase 32,863 shares of the Company's common stock for a fair value of $0.7 million. Non-equity consideration included in the acquisition totaled $6.0 million, which included cash paid for fractional shares and severance fragments under change in control agreements. Of the $6.0 million, $4.6 million was paid in cash during the third quarter, with the difference recorded as an adjustment to net assets acquired. See Note 4 to the unaudited consolidated financial statements for additional information on the acquisitions.

Balance Sheet Position and Results of Operations

During the first nine months of 2012, the Company's income available to common shareholders totaled $52.2 million, or $1.81 per share on a diluted basis, a 46.9% increase compared to the $35.5 million earned during the same period of 2011. On a per share basis, this represents an increase of 42.3% from the $1.27 per diluted share earned in 2011. On a quarterly basis, the Company earned $0.73 per diluted share in the third quarter of 2012, a 33.9% increase compared to $0.54 per diluted share in the third quarter of 2011. The Company's net income was $21.2 million for the quarter ended September 30, 2012, an increase of $4.9 million from net income of $16.3 million in the third quarter of 2011. Primary drivers of the increase in earnings over the comparable periods of the prior year include the earnings from the net assets acquired from Florida Gulf and a decrease in merger-related noninterest expenses. Key components of the Company's performance during the first nine months of 2012 are summarized below.

Total assets at September 30, 2012 were $12.5 billion, up $776.2 million, or 6.6%, from December 31, 2011. The increase was primarily the result of the Florida Gulf acquisition, which added $370.4 million in assets. Excluding the acquired assets, growth in the Company's loan portfolio was a result of organic growth in many of the Company's markets. The Company's balance sheet growth was affected by a decrease in both the Company's loan portfolio covered by Federal Deposit Insurance Corporation ("FDIC") reimbursement agreements and the related receipt of funds from the FDIC.


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Total loans at September 30, 2012 were $8.2 billion, an increase of $841.9 million, or 11.4%, from $7.4 billion at December 31, 2011. Loan growth during 2012 was driven by an increase in non-covered loans. Total non-covered loans increased $1.0 billion, or 17.1%, during the first nine months of 2012. $215.7 million, or 20.8%, of that growth was from the Florida Gulf acquisition. Covered loans decreased $195.2 million, or 14.6%, from December 31, 2011, as covered loans were paid down or charged off and submitted for reimbursement.

Total customer deposits increased $624.1 million, or 6.7%, from $9.3 billion at December 31, 2011 to $9.9 billion at September 30, 2012. By product type, the Company's noninterest-bearing deposits increased $366.5 million, or 24.7%, while interest-bearing deposits increased $257.6 million, or 3.3%. Acquired deposits from Florida Gulf accounted for 45.8% of the total growth. The increase in the Company's interest-bearing demand deposits was partially offset by the decrease in time deposits of 12.4% from December 31, 2011. The decline in time deposits is the result of the Company's effort to prudently manage the profitability of the deposit base with liquidity needs. Although deposit competition remained intense through the first three quarters of 2012, the Company was able to generate strong growth across its many other deposit products. Organic deposit growth was driven by growth in the Company's Houston, Texas, Little Rock, Arkansas, Lafayette, Louisiana, and Baton Rouge, Louisiana markets.

Shareholders' equity increased $32.5 million, or 2.2%, to $1.5 billion at September 30, 2012. The increase was the result of net income of $53.2 million and additional common stock issued in the Florida Gulf acquisition of $39.2 million. Growth in shareholders' equity was offset partially by $30.1 million in dividends paid on the Company's common stock during the period and treasury share repurchases of $40.4 million.

Net interest income increased $5.8 million, or 6.3%, in the third quarter of 2012 when compared to the same period of 2011. This increase was attributable to a $5.8 million, or 27.5%, decrease in interest expense. Interest income remained flat compared with the same period of 2011. Interest income was positively affected by a $642.9 million increase in average earning assets, due to both the inclusion of Florida Gulf earning assets in the current quarter and the organic growth in loans since December 2011. The increase due to growth in the Company's earning asset base was offset by a 25 basis point decline in the yield earned on earning assets. Compared to the third quarter of 2011, the Company's net interest margin ratio on a tax-equivalent basis remained at 3.58%.

Noninterest income increased $9.4 million, or 25.4%, for the third quarter of 2012 when compared to the same 2011 period. The increase was primarily driven by a $9.6 million increase in gains on the sale of mortgage loans held for sale. Increases of $0.7 million in title insurance income and $0.6 million in broker commissions also contributed to the increase from 2011.

Additional expenses incurred due to the expanded size of the Company drove the increase in noninterest expenses in 2012 over the third quarter of 2011. Noninterest expense in 2012 was also higher as a result of various projects designed to enhance the Company's operational efficiency and improve profitability that led to elevated levels of professional fees. Noninterest expense increased $10.3 million, or 10.3%, in the third quarter of 2012 when compared to the same quarter of 2011. The increase in total noninterest expense was attributed to higher salary and employee benefit costs of $7.3 million, as well as increased occupancy, equipment, and other branch expenses resulting from the Company's expanded footprint. In addition to personnel and other costs related to the expanding size of the Company, noninterest expenses were driven higher in 2012 by professional services expenses, as well as increased data processing expenses as the Company expands its business operations.

During the second and third quarters of 2012, the Company incurred costs associated with the pending acquisition of Florida Gulf, conversions, branch closures, severance, and process improvements that affected the Company's net income and per-share earnings for the three and nine months ended September 30, 2012. The Company incurred these costs to improve its long-term operating efficiency, risk-adjusted profitability, and long-term growth prospects. The Company also announced plans to consolidate and enhance underperforming branches, elevate sales effectiveness and improve efficiency. The total cost of these initiatives affected total noninterest expense and is discussed in further detail in the "Noninterest expense" section below.


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The Company recorded a provision for loan losses of $4.1 million during the current quarter, 33.9% lower than the $6.1 million provision recorded in the corresponding 2011 period. For the first nine months of 2012, the provision for loan losses was $15.8 million, 26.8% lower than the first nine months of 2011. The provision thus far in 2012 was primarily the result of loan growth from December 31, 2011 and provisions recorded on the Company's covered and acquired loan portfolios, as the Company had legacy net charge-offs of only $4.4 million during the first nine months of 2012. The improvement in asset quality from December 31, 2011 has offset the need for a higher allowance for loans losses as a result of loan growth thus far in 2012. As of September 30, 2012, the allowance for loan losses as a percent of total loans was 2.45%, compared to 2.62% at December 31, 2011.

The Company paid a quarterly cash dividend of $0.34 per common share, consistent with the dividend paid in the third quarter of 2011. The Company's dividend payout ratio to common shareholders was 47.2% and 61.0% for the three months ended September 30, 2012 and 2011, respectively.

The Company's focus is that of a high performing institution. Management believes that improvement in core earnings drives shareholder value, and the Company has adopted a mission statement that is designed to provide guidance for our management, associates and Board of Directors regarding the sense of purpose and direction of the Company. We are shareholder- and client-focused, expect high performance from our associates, believe in a strong sense of community and strive to make the Company a great place to work.

During 2012, the Company continued to execute its business model successfully, as evidenced by solid organic loan and deposit growth during the first nine months of 2012, despite the challenges of the current operating environment, which include enhanced regulatory scrutiny and continued interest rate pressure. The Company believes it remains well positioned for future growth opportunities, as evidenced by its liquidity, core funding, and capitalization levels. Additional discussion of the Company's financial condition and results of operations follows.

FINANCIAL CONDITION

EARNING ASSETS

Interest income associated with earning assets is the Company's primary source of income. Earning assets are composed of interest or dividend-earning assets, including loans, securities, short-term investments and loans held for sale. Earning assets averaged $10.9 billion during the quarter ended September 30, 2012, a $589.9 million, or 5.7%, increase when compared to the fourth quarter of 2011, and a $642.9 million, or 6.3%, increase over the third quarter of 2011. For the nine months ended September 30, 2012, earning assets increased $1.0 billion, or 10.9%, from the same period of 2011. The increases from the prior periods were primarily the result of earning assets acquired during 2011 and 2012. The following discussion highlights the Company's major categories of earning assets.

Loans and Leases

The Company's total loan portfolio increased $841.9 million, or 11.4%, to $8.2 billion at September 30, 2012, compared to $7.4 billion at December 31, 2011. The increase was driven by non-covered loan growth of $1.0 billion during the first nine months of 2012, but was tempered by a decrease in loans covered by loss share agreements of $195.2 million, or 14.6%. Non-covered loan growth included loans acquired from Florida Gulf of $215.7 million and organic growth of $821.4 million, or 13.6%. By loan type, the increase was primarily from commercial loan growth of $629.8 million and consumer loan growth of $287.2 million during 2012, 11.7% and 19.4% higher, respectively, than at the end of 2011.


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The major categories of loans outstanding at September 30, 2012 and December 31, 2011 are presented in the following table, segregated into covered loans and non-covered loans, including non-covered loans acquired from OMNI, Cameron, and Florida Gulf. The carrying amount of the covered loans and loans acquired from OMNI, Cameron, and Florida Gulf consisted of loans accounted for in accordance with ASC Topic 310-30 (i.e., loans impaired at the time of acquisition) and loans subject to ASC Topic 310-30 by analogy only (i.e., loans performing at the time of acquisition) as detailed in the following table.

(In thousands)                               Commercial                         Mortgage                                 Consumer and Other
                                                                                                                         Home          Credit
September 30, 2012                  Real Estate       Business        1-4 Family      Construction      Indirect        Equity          Card         Other          Total

Covered loans
Impaired (1)                        $    171,965     $     3,522     $     22,085     $          -      $      -      $    23,515     $     -      $     873     $   221,960
Performing (1)                           498,036          88,300          175,248                -             -          153,496          876         1,334         917,290

Total covered loans                      670,001          91,822          197,333                -             -          177,011          876         2,207       1,139,250

Non-covered loans
Acquired loans
Impaired (1)                              59,847           3,676              429                -             80           4,892           -            362          69,286
Performing (1)                           418,458          85,861           34,148                -          6,066          73,423           -         18,060         636,016

Total non-covered acquired loans         478,305          89,537           34,577                -          6,146          78,315           -         18,422         705,302

Other non-covered loans                2,401,531       2,267,766          222,236             9,256       313,243         945,560       48,454       177,348       6,385,394

Total non-covered loans                2,879,836       2,357,303          256,813             9,256       319,389       1,023,875       48,454       195,770       7,090,696

Total                               $  3,549,837     $ 2,449,125     $    454,146     $       9,256     $ 319,389     $ 1,200,886     $ 49,330     $ 197,977     $ 8,229,946


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(In thousands)                               Commercial                         Mortgage                                  Consumer and Other
                                                                                                                          Home          Credit
December 31, 2011                   Real Estate       Business        1-4 Family       Construction      Indirect        Equity          Card         Other          Total

Covered loans
Impaired (1)                        $     54,691     $     4,169     $     35,794     $           -      $      -      $    29,473     $     -      $      -      $   124,127
Performing (1)                           718,186         104,569          219,593                 -             -          163,174          969         3,831       1,210,322

Total covered loans                      772,877         108,738          255,387                 -             -          192,647          969         3,831       1,334,449

Non-covered loans
Acquired loans
Impaired (1)                               4,320          26,531               -                  -             17           1,247           -          2,865          34,980
Performing (1)                           496,766          68,785            4,514                 -         11,424          74,474           -         13,219         669,182

Total non-covered acquired loans         501,086          95,316            4,514                 -         11,441          75,721           -         16,084         704,162

Other non-covered loans                2,089,928       1,801,180          262,456             16,143       250,455         750,742       47,763       130,759       5,349,426

Total non-covered loans                2,591,014       1,896,496          266,970             16,143       261,896         826,463       47,763       146,843       6,053,588

Total                               $  3,363,891     $ 2,005,234     $    522,357     $       16,143     $ 261,896     $ 1,019,110     $ 48,732     $ 150,674     $ 7,388,037

(1) Loans in these categories were acquired with evidence of credit deterioration since origination. Accordingly, assumed credit losses at the purchase date were included in the balance acquired.

Commercial Loans

Commercial real estate and commercial business loans generally have shorter repayment periods and more frequent repricing opportunities than consumer and mortgage loans. Total commercial loans increased $629.8 million, or 11.7%, during the first nine months of 2012, with $749.6 million in non-covered loan growth and a decrease in covered commercial loans of $119.8 million, or 13.6%. The Company continued to attract and retain commercial customers in 2012 as commercial loans were 73% of the total loan portfolio at September 30, 2012.

The Company's investment in commercial real estate loans increased by $185.9 million during the first three quarters of 2012, and was primarily the result of acquired commercial loans of $144.5 million. Growth, however, was tempered by a decrease in covered commercial real estate loans of $102.9 million. At September 30, 2012, commercial real estate loans totaled $3.5 billion, or 43.1% of the total loan portfolio, compared to 44.9% at December 31, 2011. The Company's underwriting standards generally provide for loan terms of three to five years, with amortization schedules of generally no more than twenty years. Low loan-to-value ratios are maintained and usually limited to no more than 80% at the time of origination. In addition, the Company obtains personal guarantees of the principals as additional security for most commercial real estate loans.

As of September 30, 2012, the Company's commercial business loans totaled $2.4 billion, or 29.8% of the Company's total loan portfolio. This represents a $443.9 million, or 22.1%, increase from December 31, 2011, and is the result of acquired loans, but also the Company's focused efforts to grow its small business loan portfolio. The Company originates commercial business loans on a secured and, to a lesser extent, unsecured basis. The Company's commercial business loans may be term loans or revolving lines of credit. Term loans are generally structured with terms of no more than three to five years, with amortization schedules of generally no more than seven years. The Company's commercial business term loans are generally secured by equipment, machinery or other corporate assets. The Company also provides for revolving lines of credit generally structured as advances upon perfected security interests in accounts receivable and inventory. Revolving lines of credit generally have an annual maturity. The Company obtains personal guarantees of the principals as additional security for most commercial business loans.

Non-covered commercial loans increased $605.1 million, or 13.5%, excluding the loans acquired from Florida Gulf. Lafayette, Louisiana, Birmingham, Alabama, and the Houston, Texas markets experienced the largest growth in their commercial loan


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portfolios, but that growth was partially offset by a decrease in balances in some of the Company's other markets, the result primarily of payments on . . .

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