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IBKC > SEC Filings for IBKC > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for IBERIABANK CORP

Form 10-Q for IBERIABANK CORP


8-Aug-2014

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 June 30, 2014 and updates the Form 10-K for the year ended December 31, 2013. This discussion should be read in conjunction with the unaudited consolidated financial statements, accompanying footnotes and supplemental financial data included herein. The emphasis of this discussion will be amounts as of June 30, 2014 compared to December 31, 2013 for the balance sheets and the three months and six months ended June 30, 2014 compared to June 30, 2013 for the statements of comprehensive income. Certain amounts in prior year presentations have been reclassified to conform to the current year presentation, except as otherwise noted.

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 use of the words "may", "plan", "believe", "expect", "intend", "will", "should", "continue", "potential", "anticipate", "estimate", "predict", "project" or similar expressions, or the negative of these terms or other comparable terminology, including statements related to the expected timing of the closing of proposed mergers, the expected returns and other benefits of the proposed mergers to shareholders, expected improvement in operating efficiency resulting from the mergers, estimated expense reductions, the impact on and timing of the recovery of the impact on tangible book value, and the effect of the mergers on the Company's capital ratios. 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 level of market volatility, our ability to execute our growth strategy, including the availability of future bank acquisition 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, actual results deviating from the Company's current estimates and assumptions of timing and amounts of cash flows, credit risk of our customers, effects of the on-going correction in residential real estate prices and reduced levels of home sales, our ability to satisfy new capital and liquidity standards such as those imposed by the Dodd-Frank Act and those adopted by the Basel Committee and federal banking regulators, 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, increases in FDIC insurance assessments, geographic concentration of our markets and economic conditions in these markets, rapid changes in the financial services industry, dependence on our operational, technological, and organizational systems or infrastructure and those of third-party providers of those services, hurricanes and other adverse weather events, the modest trading volume of our common stock, and valuation of intangible assets. Those 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.

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 the consolidated financial statements. "Acquired loans" refer to all loans acquired in a business combination. Because of the loss protection provided by the Federal Deposit Insurance Corporation (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, excluding consumer loans acquired from Sterling, are significantly different from those assets not similarly covered by loss share agreements. Accordingly, the Company reports loans subject to the loss share agreements as "covered loans" and loans that are not subject to the loss share agreements 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

The Company offers commercial and retail banking products and services to customers in locations in six states through its subsidiary, 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 L.L.C. ("ICP") provides equity research, institutional sales and trading, and corporate finance services. 1887 Leasing, LLC and IB Aircraft Holdings, LLC own 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, L.L.C. ("CDE") is engaged in the purchase of tax credits.


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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. In 2013, the Company reviewed its long-term financial and strategic goals in light of changes affecting the banking industry, including evolving economic conditions, a change in regulatory environment, and interest rate fluctuations. The Company strives to improve long-term shareholder returns by setting challenging financial goals and executing to achieve these goals in consideration of the current and anticipated operating and regulatory environment. 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 2014, the Company continued to execute its business model successfully, as evidenced by solid organic loan growth thus far, despite the challenges of the current operating environment, which include regulatory developments, increased competition, enhanced regulatory scrutiny and continued interest rate pressure. The Company also continued to develop its non-interest revenue streams, particularly from its wealth management and mortgage production subsidiaries. In 2013, the Company also focused on improving its short- and long-term profitability through a number of cost saving initiatives implemented throughout the year and into 2014. As a result of its efforts, the Company believes it remains well positioned for future growth opportunities, as evidenced by the strength in its liquidity, core funding, and capitalization levels.

Thus far in 2014, the Company continued to experience growth in many income statement and balance sheet metrics, including net interest income, net income, loans, deposits, and shareholders' equity. For the first two quarters of 2014, net interest income grew $24.0 million, or 12.7%, while non-interest income decreased $3.3 million, or 3.8%, from the same six-month period of 2013. Non-covered loans grew by $1.5 billion, or 17.6%, during the first six months of 2014 to $10.3 billion at June 30, 2014, partially a result of acquired loans of $1.1 billion, while covered loans decreased by $134.4 million, or 18.7%. The mix of deposits continued a shift to non-interest-bearing, which represented 25.4% of total deposits at June 30, 2014, up from 24.0% at December 31, 2013. In 2014, the Company believes its liquidity, both on balance sheet and off balance sheet, continued to be favorable. The Company had cash of $668.6 million at June 30, 2014, and the Company has funding availability from the Federal Home Loan Bank (the "FHLB") and correspondent bank lines to continue to meet cash flow needs. Additionally, its capital ratios were in excess of "well capitalized" from a regulatory perspective and its primary risk measures remained favorable. All of these factors allow the Company to maintain its strategic positioning within the challenging banking environment, provide a strong base from which to continue to grow its balance sheet, and remain positioned to provide currently anticipated increases in shareholder value throughout 2014.

Non-interest income decreased $3.3 million, or 3.8%, to $83.6 million for the first six months of 2014, as the Company's mortgage origination and title businesses both had a slowdown in activity, as mortgage sales volume decreased 45.2% from the six-month period of 2013, which led to an $8.6 million decrease in mortgage income. Title income was $9.4 million, down 12.0% when compared to 2013. However, non-interest income from the Company's investment in its trust and wealth management businesses continued to increase, as brokerage commissions increased 28.8% over the first six months of 2013.

In the first two quarters of 2014, non-interest expense decreased 10.5% from the same period of 2013. On a basis consistent with generally accepted accounting principles ("GAAP"), non-interest expenses for the six months ended June 30, 2014 were $234.8 million, $27.5 million lower than the first two quarters of 2013. The largest component of the decrease was a $31.0 million decrease in impairment of the Company's FDIC loss share receivables recorded between the two periods. In addition to the impairment, the Company incurred $2.3 million in debt prepayment penalties that also contributed to the higher non-interest expenses in 2013. Non-interest expense, excluding the impairment and other non-operating items ("non-GAAP", see table 2 below) totaled $215.9 million thus far in 2014, a decrease of $4.3 million versus the prior year. The decrease in operating non-interest expense was a result of lower employee-related expenses as the Company has improved its overall operating efficiency.

The provision for loan losses increased $8.4 million during the first six months of 2014 when compared to the same 2013 period, due primarily to organic loan growth during the period, but was partially offset by an improvement in asset quality in the legacy portfolio over the past 12 months.

Net income available to common shareholders for the six months ended June 30, 2014 increased $24.6 million to $1.35 per diluted share. Operating earnings (non-GAAP) for the first two quarters of 2014 increased $9.5 million to $51.6 million, or $1.70 on a per share basis.

Acquisition Activity

Over the past 14 years, the Company's growth has included growth from targeted acquisitions the Company determined would provide additional value to existing shareholders and be a strong strategic fit with the Company.

In the first quarter of 2014, the Company completed the acquisition of the Memphis, Tennessee operations of Trust One Bank, a division of Synovus Bank ("Trust One-Memphis"), which expanded the Company's presence in the Memphis market. During the second quarter of 2014, the Company also completed the acquisitions of Teche Holding Company ("Teche") and its subsidiary bank, Teche Federal Bank, based in New Iberia, Louisiana, and First Private Holdings, Inc. ("First Private"), the holding company of Dallas, Texas-based First Private Bank of Texas. The Teche acquisition expanded the Company's presence in the Acadiana region of Louisiana through the acquisition of 20 branches in the area, while the First Private acquisitions expanded the Company's presence into the Dallas, Texas market.


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

              TABLE 1 - SUMMARY OF CURRENT PERIOD ACQUISITIONS (1)



(Dollars in thousands)              Trust One -Memphis          Teche          First Private           Total
Assets
Cash                               $             92,060       $  71,606       $        26,621       $   190,287
Investment securities                                -           25,169                19,110            44,279
Loans                                            86,889         699,950               298,632         1,085,471
Other real estate owned                           1,325             329                    -              1,654
Core deposit intangible                           2,597           2,055                   506             5,158
Goodwill                                          8,814          84,432                28,660           121,906
Other assets                                        368          58,626                 4,084            63,078

Total assets                       $            192,053       $ 942,167       $       377,613       $ 1,511,833
Liabilities
Non-interest-bearing deposits      $             26,373       $ 118,256       $        50,333       $   194,962
Interest-bearing deposits                       164,942         521,348               261,933           948,223
Borrowings                                           -          140,532                 6,451           146,983
Other liabilities                                   738           5,291                   256             6,285

Total liabilities                  $            192,053       $ 785,427       $       318,973       $ 1,296,453

(1) Assets and liabilities in this table were recorded at fair value at the time of acquisition. Fair values are preliminary and subject to change. See Note 4 of the unaudited consolidated financial statements for additional information.

The Company believes these acquisitions, as well as a continued focus on high quality organic growth, improvements in efficiency, and development of fee-based businesses, will allow the Company to achieve its long-term objectives throughout 2014 and continue to improve long-term shareholder value.

FINANCIAL OVERVIEW

The Company's net income available to common shareholders for the second quarter of 2014 totaled $18.5 million, or $0.60 per diluted share, compared to $15.6 million, or $0.53 per diluted share, for the same three-month period of 2013. On an operating basis (non-GAAP), per share earnings were $0.96 per share, up $0.27 from the $0.69 in operating earnings per share in 2013. On a year-to-date basis, net income of $40.9 million, or $1.35 per diluted share, was $24.6 million higher than the six-month period ended June 30, 2013. Primary drivers of the increase in earnings over the prior year include earning asset growth (both organic and through acquisitions) and a decrease in non-interest expenses. Key components of the Company's performance during the second quarter and first six months of 2014 are summarized below.

Net interest income increased $12.5 million, or 13.0%, in the second quarter of 2014 when compared to 2013, and $24.0 million, or 12.7%, on a year-to-date basis. The quarter-to-date increase was attributable to an $11.0 million increase in interest income and a $1.5 million, or 12.4%, decrease in interest expense. Compared to the second quarter of 2013, the Company's net interest margin on a tax-equivalent basis increased to 3.38% from 3.29% due to changes in the volume and mix of the Company's assets and liabilities as well as deposit rate decreases driven by repricing opportunities over the past 12 months. Similarly, year-to-date interest income increased $18.9 million, or 8.8%, while interest expense decreased $5.2 million, or 20.5%. Interest income was positively affected by a $686.3 million increase in year-to-date average earning assets since June 30, 2013. The net loan yield, however, decreased 11 basis points and was negatively impacted by a 79 basis point decrease in the net covered loan yield driven by additional amortization on the loss share receivables.


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Non-interest income totaled $48.0 million in the second quarter of 2014, an increase of $5.5 million, or 12.9%, when compared to the second quarter of 2013. For the first six months of 2014, non-interest income decreased 3.8%, or $3.3 million. However, the Company had a $2.1 million increase in broker commissions, as well as an increase of $1.3 million in service charges that partially offset the mortgage income decrease between the two periods. Also positively affecting non-interest income during the first six months of 2014 was a $1.5 million increase in income from bank-owned life insurance, the result of additional income received from the payment of two life insurance policies in the current period.

Non-interest expense for the first six months of 2014 decreased $27.5 million from the same period of 2013 and was attributable primarily to the $31.8 million impairment charge recorded during the first quarter of 2013. For the second quarter of 2014, non-interest expenses were $10.0 million higher than the second quarter of 2013, primarily a result of $10.4 million in merger-related expenses. Excluding certain non-operating expenses, non-interest expenses during the three- and six-month periods of 2014 decreased primarily as a result of lower salary and employee benefit costs, net occupancy and equipment, and marketing expenses.

The Company recorded a provision for loan losses of $6.9 million thus far in 2014 (including $4.7 million in the second quarter of 2014), $8.4 million above the provision recorded in the first two quarters of 2013. The provision in 2014 was impacted by loan growth during the period, but was tempered by an overall improvement in the Company's asset quality, especially in its non-covered, non-acquired loan portfolio. The improvement in asset quality from December 31, 2013 has partially offset the need for a higher allowance for loan losses as a result of loan growth thus far in 2014. As of June 30, 2014, the allowance for loan losses as a percent of total loans was 1.23%, compared to 1.51% at December 31, 2013, and was 63.7% of non-performing loans at June 30, 2014, compared to 52.5% at the end of 2013.

The Company paid a quarterly cash dividend of $0.34 per common share in the second quarter of 2014 and $0.68 for the year-to-date period. These amounts were consistent with the quarterly dividends paid for the same periods in 2013.

Total assets at June 30, 2014 were $15.3 billion, up $2.0 billion, or 14.7%, from December 31, 2013. Acquired assets of $1.5 billion and legacy loan growth of $546.4 million, or 6.6%, across many of the Company's markets drove the increase in total assets. A $134.4 million decreases in covered loans since the end of 2013 partially offset these increases. The Company's FDIC loss share receivables also decreased $41.8 million, or 25.7%, since December 31, 2013, due primarily to amortization and cash receipts from the FDIC.

Total loans at June 30, 2014 were $10.9 billion, an increase of $1.4 billion, or 14.8%, from $9.5 billion at December 31, 2013. As noted above, loan growth during the first six months of 2014 was driven by a 17.6% increase in non-covered loans. Of the $1.5 billion in non-covered loan growth, the Company acquired $1.1 billion in loans from Teche, First Private, and Trust One-Memphis, and had organic growth of $546.4 million. Covered loans decreased 18.7% from December 31, 2013, as covered loans were paid down or charged-off and submitted for reimbursement.

Total customer deposits increased $1.2 billion, or 11.6%, to $12.0 billion at June 30, 2014. The Company acquired $1.1 billion in total deposits from Teche, First Private, and Trust One-Memphis, and had deposit growth of $94.7 million excluding these acquired deposits thus far in 2014. Non-interest-bearing deposits increased $471.4 million, or 18.3%, while interest-bearing deposits increased $772.7 million, or 9.5%. Excluding acquired deposits, the Company's non-interest-bearing deposits increased $270.2 million while interest-bearing deposits decreased $175.5 million. This decrease was primarily the result of decrease in interest-bearing checking deposits from December 31, 2013. Although deposit competition remained intense, the Company was able to generate growth across many of its deposit products. Organic deposit growth was driven by growth in the Company's Little Rock, Arkansas, Southwest Louisiana, and Acadiana (Louisiana) markets.

Shareholders' equity increased $268.3 million, or 17.5%, from year-end 2013. The increase was primarily driven by 3.3 million common shares issued in the Teche and First Private acquisitions, which resulted in additional equity of $214.7 million, as well as undistributed net income of $19.4 million and a $21.2 million increase in other comprehensive income, a result of the change in the unrealized gain in the Company's available for sale investment portfolio at the end of the second quarter of 2014.

The discussion and analysis below contains financial information determined by methods other than in accordance with GAAP. The Company's management uses these non-GAAP financial measures in their analysis of the Company's performance. These measures typically adjust GAAP performance measures to exclude the effects of the amortization of intangibles and include the tax benefit associated with revenue items that are tax-exempt, as well as adjust income available to common shareholders for certain significant activities or transactions that, in management's opinion, distort period-to-period comparisons. Since the presentation of these GAAP performance measures and their impact differ between companies, management believes presentations of these non-GAAP financial measures provide useful supplemental information that is essential to a proper understanding of the operating results of the Company's core businesses. These non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of GAAP to non-GAAP disclosures are included in the table below.


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            TABLE 2 - RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES



                                                                           Three Months Ended June 30
                                                             2014                                               2013
(Dollars in thousands, except per
share amounts)                          Pre-tax        After-tax        Per share (1)      Pre-tax        After-tax        Per share (1)
Net income (loss) (GAAP)                $ 24,819      $    18,548      $          0.60     $ 19,803      $    15,590      $          0.53
Non-interest expense adjustments
Merger-related expenses                   10,419            6,840                 0.22           -                -                    -
Severance expenses                         5,466            3,553                 0.11        1,670            1,086                 0.04
Storm-related expenses                         4                3                   -            -                -                    -
Gain (Loss) on sale of long-lived
assets, net of impairment                  1,241              807                 0.03        4,618            3,002                 0.10
Provision for FDIC clawback liability         -                -                    -           130               84                   -
Occupancy expenses and branch closure
expenses                                      14                9                   -           306              199                 0.01
Termination of debit card rewards
program                                       -                -                    -           450              293                 0.01
Professional expenses and litigation
settlement                                    -                -                    -           150               97                   -
Non-interest income adjustments
Loss (Gain) on sale of investments            (8 )             (5 )                 -            57               37                   -
Other non-interest income                     (1 )             (1 )                 -            -                -                    -

Operating earnings (non-GAAP)             41,954           29,754                 0.96       27,184           20,388                 0.69
Covered and acquired (reversal of)
provision for loan losses                  1,744            1,134                 0.04       (1,609 )         (1,046 )              (0.03 )
Other provision for loan losses            3,004            1,953                 0.06        3,416            2,221                 0.07

Pre-provision operating earnings
(non-GAAP)                              $ 46,702      $    32,841      $          1.06     $ 28,991      $    21,563      $          0.73

(1) Per share amounts may not appear to foot due to rounding.


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                                                                             Six Months Ended June 30
                                                             2014                                                2013
(Dollars in thousands, except per
share amounts)                          Pre-tax        After-tax        Per share (1)       Pre-tax        After-tax        Per share (1)
Net income (loss) (GAAP)                $ 55,377      $    40,943      $          1.35      $ 15,644      $    16,307      $          0.55
Non-interest expense adjustments
Merger-related expenses                   11,386            7,469                 0.25           157              102                   -
Severance expenses                         5,586            3,631                 0.12         1,767            1,149                 0.04
Storm-related expenses                       188              122                   -             -                -                    -
. . .
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