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Edited Transcript of IBKC earnings conference call or presentation 18-Oct-19 1:30pm GMT

Q3 2019 IBERIABANK Corp Earnings Call

LAFAYETTE Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of IBERIABANK Corp earnings conference call or presentation Friday, October 18, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony J. Restel

IBERIABANK Corporation - Vice Chairman & CFO

* Daryl G. Byrd

IBERIABANK Corporation - President, CEO & Director

* Fernando Perez-Hickman

IBERIABANK Corporation - Vice Chairman & Director of Corporate Strategy

* Jefferson Glenny Parker

IBERIABANK Corporation - Vice Chairman and Director of Capital Markets, Energy Lending & IR

* Michael J. Brown

IBERIABANK Corporation - Vice Chairman & COO

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Conference Call Participants

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* Casey Haire

Jefferies LLC, Research Division - VP and Equity Analyst

* Catherine Fitzhugh Summerson Mealor

Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP

* Christopher William Marinac

Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst

* Ebrahim Huseini Poonawala

BofA Merrill Lynch, Research Division - Director

* Jennifer Haskew Demba

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Matthew Covington Olney

Stephens Inc., Research Division - MD

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good morning, and welcome to the IBERIABANK Corporation Third Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jeff Parker, Vice Chairman, Director of Capital Markets, Energy Lending and Investor Relations. Please go ahead, sir.

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Jefferson Glenny Parker, IBERIABANK Corporation - Vice Chairman and Director of Capital Markets, Energy Lending & IR [2]

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Good morning, and thank you for joining us today for this conference call. On our call this morning, Daryl Byrd, our President and CEO, will make summary comments on our earnings report, after which we will move into Q&A. Anthony Restel, our Chief Financial Officer; Michael Brown, our Chief Operating Officer; Fernando Perez-Hickman, our Director of Corporate Strategy; Terry Akins, our Chief Risk Officer; and Nick Young, our Chief Credit Officer, are all available for the Q&A session of this call.

If you've not already obtained a copy of the 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 October 25. Information regarding that replay is provided in the press release.

Our discussion this morning deals with both historical and forward-looking information. Our safe harbor disclaimer is provided in the press release and in the supplemental presentation.

At this point, I'll turn it over to Daryl for his opening remarks. Daryl?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [3]

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Thanks, Jeff, and good morning, everyone. I'm pleased to report another quarter of solid results. We reported both GAAP and core earnings per share of $1.82 for the third quarter. Given the ever-changing economy and interest rate environment, I'm extremely proud of our company's ability to produce strong financial results, grow our client base, show good gains in both loan growth and core deposit growth while remaining focused on expense management and maintaining strong credit quality.

For the quarter, both on a reported and core basis, we achieved a 1.26% return on average assets, a 14.48% return on tangible common equity and a tangible efficiency ratio of 53%. In the third quarter, total loans increased $321 million or 6% on an annualized basis. On a year-to-date basis, we added $1.2 billion in total loan balances and annualized growth rate of 7%. Deposit growth was also very strong as we experienced growth in all but 3 of our operating markets. Total deposits increased $682 million or 11% on an annualized basis with no increase in our broker deposit position. On a year-to-date basis, we have added $1.2 billion in total deposit balances and annualized growth rate of 7%. With continued client growth and positive expectations for the remainder of the year, we're adjusting our guidance range for both loans and deposits to between 6.5% and 7.25% for the full year 2019.

I think it's important to reflect on the success of our business model over the years in growing our franchise through strong loan and deposit growth and recruiting talented teams. For example, over the past 10 years, we've grown our presence in Alabama from our initial entrance in 2009 to over $2 billion in total loans. Over the same time period, we entered Florida and have now almost $10 billion in deposits. I'm proud of our ability to develop new markets and continue to see great opportunities to enhance our franchise, recruit talented associates and grow our balance sheet. I strongly believe we're in the right markets in the southeast.

As we've consistently telegraphed on prior calls, we continue to feel the impact of downward pressure on interest rates and net interest margin. Net interest margin for the quarter was 3.44% on a GAAP basis, down 13 basis points from the second quarter and 3.34% on a cash basis. We hit the inflection point on liabilities as our cost of deposits for September was flat compared to August, and we've seen rates begin to decline in the first part of October. Technically, the fourth quarter of the year is our strongest in terms of deposit inflows as institutional and public funds ramp up. Further, we expect to see positive deposit rates continue to decline throughout the remainder of the year and into 2020.

The current low rate environment has benefited our fee-based businesses throughout this year and continued to be the driver for very strong, core noninterest income during the quarter. Core noninterest income increased $3.8 million or 6% on a linked-quarter basis to $63.6 million, a record level for us. The increases were primarily driven by $3 million gain on the sale of certain nonmortgage loans, which is considered core, along with increases in service charges on deposits and customer swap income. Activity in the mortgage business remains very brisk with gains in the quarter consistent with the prior quarter and up 37% on a year-over-year basis. The mortgage pipeline remains elevated at $269 million as of mid-October and provides good visibility that mortgage activity will remain strong into the last quarter of the year.

Our customer swap business is also seeing significant activity as a result of lower interest rates. Year-to-date swap income is up 113% versus last year at this time. These businesses, which thrive in the lower interest rate environment, can help to provide a partial offset to the net interest margin compression. Given the current and projected low interest rate environment, we expect these businesses to continue to perform very well in the fourth quarter, and that strength should carry into 2020. We are also very optimistic that our noninterest income levels during the fourth quarter will be at the upper end of the guidance range provided.

Core noninterest expense increased $3.1 million or 2% compared to the linked quarter, primarily driven by a write-off of long-lived assets, again, a onetime expense but still considered core. Excluding the write-off, total core noninterest expense increased less than 1% from the prior quarter. Our core tangible efficiency ratio remained strong coming in at 53% for the third quarter. We have been and continue to remain extremely diligent around expenses.

We continue to allow the investment portfolio to compress as we fund additional growth in loans. At the end of the quarter, the investment portfolio was approximately 14% of total assets. We continue to see this as a benefit to our margin and anticipate employing this strategy for at least another quarter.

The bank's credit metrics remain strong and stable. Classified assets continue to decrease and now represent 89 basis points of total assets. Additionally, net charge-offs for the quarter were $8 million or 14 basis points of average loans, the same as in the prior quarter. We see no signs of credit deterioration in the loan portfolio. We also believe our credit culture has and should continue to benefit us if we encounter increased uncertainty in the economy.

During the quarter, we repurchased approximately 552,000 common shares at a weighted average price of $72.46 per common share or approximately $40 million in total value. As a reminder, on July 17, 2019, we announced a new common stock repurchase plan of up to 1.6 million shares or approximately 3% of our outstanding common shares. There are currently approximately 1.2 million shares remaining in the plan, which we expect to complete over the next 3 quarters.

For the first 9 months of 2019, through a combination of cash dividends and repurchases of our common shares, we have returned approximately 94% of net income to common shareholders. As we continue to look at the projected rate environment, we have again revised our full year 2019 guidance to account for another 25 basis point cut in the Federal Funds rate, which we expect to occur this month. This follows the recent cuts in July and September that we already had factored in for 2019.

As you can see with our updated guidance, we continue to manage through changing environments to deliver solid results. Specific changes to our guidance include the following: the range for average earning assets moved up again slightly as we anticipate coming in between $28.7 billion to $29 billion. We adjusted the range on interest margin for the full year to 3.43% to 3.47%. We decreased the provision expense range to $38 million to $43 million. Noninterest income increased to a range of $230 million to $235 million. Noninterest expense was reduced to between $667 million and $673 million. We adjusted our preferred dividend and unrestricted shares allocation to a range of 16 million to 17 million. Finally, we tightened our tax rate to a range of 23.5% to 24%. This adjusted guidance still aligns us with current consensus estimates.

As I've said many times, we continue to be very focused and disciplined while producing high-quality earnings and are not interested in stretching to do a deal. Relative to 2020, we recognize that we're asset-sensitive, and we may get more cuts beyond the one projected for later this month. As you would expect, we will be very proactive managing our business to help mitigate some of the negative impact of NIM compression while continuing to grow our business for the long term.

Specifically, we believe that expense savings opportunities exist, capital management activities remain attractive and viable and our growth from diverse markets provide some solid offsets. Historically, IBERIABANK has done quite well in challenging times. I would expect us to rise to the occasion once again next year.

We feel good about the business. We remain passionate about building client relationships, delivering long-term shareholder value and investing in our communities. Once again, I want to thank our dedicated associates for their focus and hard work in continuing to execute our strategy and grow our franchise.

At this time, let's open the lines for questions. Marco?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first question comes from Catherine Mealor of KBW.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [2]

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I wanted to start with the margin. If you look at your guidance for fourth quarter and we run that for just to the fourth quarter, then from my math, it looks like the high end of the range is getting the margin around 3.25% for next quarter. So one, I want to make sure that we're kind of thinking about that correctly. And then secondly, is there anything kind of onetime or in terms of recoveries or deposit cost that are pushing the fourth quarter margin low, too low, that we may see some recovery from that as we look to 2020?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [3]

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Yes. Anthony. Anthony has got this one. Anthony?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [4]

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Yes. So Catherine, relative to the guide, yes, the 3.25% would be implied by the guide that we've got out there. A couple of things just to remember, right? So we did add an October cut. Remember that we are asset-sensitive. We've got -- from a repricing perspective, we've got about 50% of our loans are going to reprice, and I'll call it 100% deposit beta with that October move that we're projecting. And then like we talked about last quarter, there's a little bit of a lag relative to C&I deposits come back and move. So I think when you look at the fourth quarter rate, we've got an additional cut, right? So 3 cuts in a row from the Fed that we're still trying to catch up from C&I deposits rollover. At the same time, we're projecting a little bit less on recoveries in the fourth quarter. We talked about $20 million for the year. We're at $17.7 million, so we haven't adjusted that again. Recoveries are hard for us to kind of gauge, but we went ahead and brought that down just to be safe on the guide.

I think as we sit here and look at the fourth quarter, we have started to see our deposits roll over, which is very good. I think the pace of that is going to accelerate as we move through fourth -- the fourth quarter into 2020. And then naturally, we're seeing some nice offsets from the lower rate environment that's coming through on the fee businesses. So I think as we look at it, we feel actually like not too bad relative to where we were. The only thing that's really different for us is we've got an extra cut that we've got to deal with now as opposed to next year. So I think all in all, we feel pretty good about where we are.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [5]

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Okay. And then if we look at consensus for 2020, on average, the margin, the 3.38% versus that fourth quarter 3.25%, and now I know everyone has different assumptions for what rates you're going to do next year, so it's hard to make sense of it. But I mean, if that 3.25% implies that there's fairly significant downside to consensus estimates in 2020 as we think about the margin, is that a fair way to think about this...?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [6]

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You know what, I think that there's a host of different estimates out there relative to cuts. I mean we've got some people talking about 5 more cuts. We got some people talking about 1 more cut. I think what I would tell you relative to the 2020 guidance is that we feel pretty good about what we're going to see in the October cut. I think right now, you've got a possibility of another cut sometime, I'll call it, late into the first quarter, midyear-ish next year. I think the thing that might be missing from the guidance would be, yes, the margin is going to come down, but what you don't really see, I think, embedded in the guidance would be the strength of the fee businesses that we should get from lower interest rate environment.

Certainly, we're going to have really good loan-to-deposit growth, given that we think credit will be fairly stable as we move through next year. I think that inflection on deposit costs and we talked about that repricing is going to accelerate into next year, which will help the margin a little bit. We do have the ability to reduce expenses. I'll just point out that we've reduced our expense -- midpoint of the expense guide 4 quarters in a row. So although we're not out telegraphing big expense move, we're very active, and you should expect that to continue. And then look, there's viable and attractive capital market restock options that are viable and look attractive and can meaningfully improve EPS next year. So I think as we think about our business, we feel real good about where we're positioned today against -- we recognize we are asset-sensitive, but we've got a lot of other good things working our way. And as Daryl mentioned, we've actually done quite well historically during challenging times. So I think we kind of look at it more as a glass more than half full versus we're half empty here.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [7]

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I would add to that. Look, we can't predict what the rate environment is going to look like. Frankly, as we look at our markets and our clients, they're all doing pretty well, which correlates over to we got excellent loan growth, excellent deposit growth. Yes, our clients are doing well. We got great credit. And our fee businesses, given the rate environment, are doing extremely well. So we've always tried to answer the challenge, and we always try to get ahead of the challenge. And historically, we've executed multiple expense initiatives. But as Anthony said, we rarely telegraph those until we've already executed them. So we're going to try to get ahead of this rate environment and certainly do the best we can to make it work for us.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [8]

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That's great, and I'd put that in perspective, for sure. Maybe if I could just have one other follow-up on the margin just to stay on the topic is that on cash versus reported margin as we think about accretable yield for next year, is there anything that we should be thinking about for that? We've seen about $13 million kind of on average in noncash accretion over the past couple of quarters. Does that change significantly going into next year post-CECL? Or how should we think about that in a post-CECL world?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [9]

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So a couple of thoughts for you, Catherine. One is, obviously, we've got recovery income that's embedded somewhat in that line, and that's really hard for us to kind of predict. We've talked about. But the base level of accretion on the portfolio is fairly constant. It'll roll down. I mean the actual income level will roll down as the portfolio kind of burns off, but the incremental accretion from a yield perspective on the base level is fairly consistent. CECL, not really expected to have an impact on that accretion level. And again, we don't have a cliff or anything associated with that because most of the assets we picked up were more mortgage-driven instruments with a very long life.

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Operator [10]

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And our next question today comes from Ebrahim Poonawala of Bank of America.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [11]

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I guess just a question to some of the things that you mentioned to Catherine's question around expense and then the focus there. Like understanding all the macro uncertainties, Daryl, can you talk about just your expectation to getting positive operating leverage as we think about next year? I think you guys have done a great job cutting expenses, improving efficiency over the last year or 2. Would love to get your thoughts in terms of a few things that is achievable next year. Or could we see the efficiency ratio take higher in 2020?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [12]

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Look, we're going to manage what we can. I think Anthony was pretty straightforward. We've lowered our expense guide 4 quarters in a row. My comment is we've done mostly expense initiatives over the last several years, but we rarely telegraph those until we executed them for a lot of reasons. So we're going to work pretty hard at that.

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [13]

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Ebrahim, the only thing I would add is, next year, given kind of low rates, we are expecting to see some significant strength from the fee businesses. And that could, just given the nature of those businesses, can be -- being very people-driven, could put some slight upward pressure on the efficiency ratio. Again, as Daryl mentioned, we're going to be working very hard on the rest of the expense base. So we'll see if we can offset it. I'll just point out, though, that we are going to see higher levels of commissions and some stuff next year.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [14]

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Got it. And just in terms of following up on CECL, it's a pretty meaningful jump. On average, we've seen banks talk about 30% to 40% increase to their basis around CECL adoption. I'm just wondering, Anthony, if you can talk about any particular characteristics within your loan book, which is pushing it higher and how that influences everything about provisioning for incremental growth going forward.

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [15]

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Yes. So I'll point out that I think the biggest thing driving the percentage increase is the fact that we've got a large acquired portfolio that has very little reserve coverage on it today just by the -- I guess, how the way the accounting is prescribed in the current methodology. Obviously, we picked up some level of longer-lived assets from the mortgage portfolios that came -- or the resi books that came with the recent acquisition. And so given the longer life of those portfolios as well as the kind of that small residual HELOC portfolio, naturally pushed the average life of the portfolio a little longer. And so those would be the primary 2 or 3 drivers that are making up the bulk of the increase. Again, not that we expect credit to be different, just it's a function of the life of the portfolio.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [16]

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So would the runoff of the acquired book be incrementally positive as we think about next year or 2 and how it plays with the CECL math?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [17]

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I'm sorry, can you give me that one more time?

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [18]

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Yes. Would the runoff of the acquired sort of portfolio be incrementally positive to just provisioning going forward as some of those balances run off or...?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [19]

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Yes. Look, I'll tell you that I don't know relative to the allowance perspective that the portfolio running off is going to make a big deal as we talk about just provision. I think as we move into next year, I think what you're going to see us talk about is we have a portfolio. I think the concept for us is legacy and acquired will kind of go away because accounting is largely indifferent at that point. I don't expect to see a significant increase in provision levels as we move forward from the new adoption. It might be a couple of million but not going to be material, and so I hope that helps you with that, Ebrahim.

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Operator [20]

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And our next question today comes from Michael Rose of Raymond James.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [21]

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Just a question on the mortgage business. So the MBA's forecast obviously project a decline in volumes next year, but I know you guys are kind of in the midst of retooling your mortgage business. How should we think about the ability to continue to drive profitability in that business and to actually increase revenue next year?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [22]

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Michael, I'm going to turn this one over to Fernando, but I'll start by saying we feel very good about the progress we've made in mortgage. I think that team has done a great job for us. Fernando?

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Fernando Perez-Hickman, IBERIABANK Corporation - Vice Chairman & Director of Corporate Strategy [23]

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I think there are 2 components to that question. One, when we look at the pipeline that we have this year, I mean, as of this quarter compared to last year, we are looking at a pipeline that is more than 60% higher, and that make us feel good about the production in the coming quarters. But at the same time, we are combining that production with hiring new MLOs in the different markets that we are present and working on efficiencies. We've been working, in the last couple of years, on releasing the fixed cost over the total amount of cost of the mortgage business. And to give you some idea of the evolution, in 2017, we had 65% of the total cost was fixed. And now that number is 56%, and we keep working on efficiencies and standardizing an improved -- process improvement to combine better revenue with a more viable structure of the cost basis of the business.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [24]

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Okay. That's helpful. And then just as a follow-up question, you guys highlighted energy growth this quarter as one of the drivers of overall loan growth. I know there's been some consternation, at least among investors, around energy. Can you just talk about how you feel about the size of the portfolio, what you're growing at this point and if we should -- if there's any worries out there for you guys?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [25]

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Yes, Michael. We feel good about our energy portfolio. Jeff, do you want to talk about some?

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Jefferson Glenny Parker, IBERIABANK Corporation - Vice Chairman and Director of Capital Markets, Energy Lending & IR [26]

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Sure. I'd be happy to. We have continued to get good growth out of that portfolio since we really reentered the market, Michael. I think you know that 2017, '18 and '19 have been good. We were at 5.9% in terms of the overall portfolio right now. Frankly, that's not terribly different than where we were at 4.8% in 2015. So we're comfortable with our level of exposure. I should mention to you, and this is important to me -- last week, I had the pleasure of sitting down and doing a portfolio review, and we had our Chief Credit Officer and our Chief Risk Officer. And I think I can report to you today that we feel very, very good about our portfolio. And frankly, during that portfolio review, we did not discover any new information.

As you know, we have a balanced portfolio, largely E&P, 62% of our portfolio; and midstream, 33%. We haven't made field service loan in 5 years. That's down probably from about 35% to 5% today. And we feel good about our mix. I should probably also mention to you that 66% of our portfolio is P/E-backed, and we have not seen people back away from the market in supporting their investments. I will also go so far as to say, because I've seen several other people make comments on it, the question comes up, "How about the recent SNC exam that went on nationally?" We saw no material impact to our portfolio as a result of that.

So net-net, we feel good. We do continue to see, unfortunately, probably some misinformation in the markets. From time to time, people cite statistics. I saw one the other day where we were mentioned to have a $20 million exposure and a credit that fully paid off for us 18 months ago. We don't have -- we have a policy of not commenting on specific credits. But I would say that before people calculate and crank that into their assumptions, they got to look more closely.

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Michael J. Brown, IBERIABANK Corporation - Vice Chairman & COO [27]

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If I could add, it's Michael. Just -- energy has certainly been an important contributor to our company, and we feel very comfortable with that part of the portfolio. I would emphasize that we do have a diversified growth story as a company and that we see loan growth coming from multiple markets, multiple industries. We've talked last time about our Equipment Finance Business being a strong contributor to the growth of the company. That continues. If you looked at the numbers for the quarter, we saw real estate loan declined. We saw C&I increase. That was a conscious effort or is a conscious effort on the part of the company to diversify the loan portfolio. And we've seen runoff in our home equity business, which we more than offset. And that runoff is just tied to people refinancing into the mortgage business, which helps Fernando's part of the company out as well. So we feel like we have a very defined growth story and feel very comfortable with our ability to growing our clients.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [28]

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So layering all that together, Michael, fair to say that a mid-single-digit loan growth for next year is a good starting point?

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Michael J. Brown, IBERIABANK Corporation - Vice Chairman & COO [29]

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Yes, I would say so. The -- one of the things that I would emphasize, and I did it in my last comment, we've had a lot of success lately with recruiting. I mean that's something we consciously always are doing. But of late, we've seen an increase in activity from larger institutions. And with that recruiting, we've taken up some very talented people who've got access to some large client portfolios. That has some very significant upside for us in all of our markets. So start with the single-digit number that you mentioned, and the potential is higher.

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Operator [30]

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Our next question today comes from Casey Haire of Jefferies.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [31]

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Wanted to follow up on the deposit cost. It does sound like they're rolling over here or started to roll over here in the third quarter, but it did -- I mean it seemed like last quarter, you guys were talking pretty optimistically about deposit cost. So I was just wondering, could you give us some color as to what surprised you? Was it competitive pressures? And then if we could get spot rates for the money market accounts and CDs specifically at September 30, just to give us a gauge as to how things are entering the fourth quarter here.

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [32]

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Yes, Casey. A couple of things. I think last quarter, we talked about that we felt we'd see deposit rates roll in 60 to 90 days, and that we were thinking deposit rates would kind of plateau during the quarter. So I think what we actually talked about last quarter is actually what happened this quarter. It's a little bit hard to give you spot rate, deposit rates because we do price deposits differently in every market, and deposit rates are very fluid, right? So we talked last quarter about that we were going to be a fast follower on deposit rates. We've maintained to that. And so what I can tell you is deposit rates are moving down, and we're adjusting rates fairly constantly across the 32 different markets at different paces.

I'll give you just as a couple of quick examples, right? We look at October month to date, right? CDs are down 25 basis points below the third quarter origination yields. So just in the first couple of 2 weeks or so in October, we're down just 25 basis points within the CD book, right? Just as an example of how fluid that is. So a little bit hard to give you a rate. I can just tell you that we are just following the market closely, and we expect that those -- that deposit repricing will accelerate. And to be honest with you, the more the Fed moves and the more often they move and the more headline news, the more cover it gives for us to move rates, so I think we'll see some pretty good momentum heading into the fourth quarter. And then we'll always be in a little bit of a catch-up, just recognize if we get 2, 3, 4 cuts in a row, it's going to take us a little bit to catch up, but we will get some upside as long as we get to the final end of those cuts.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [33]

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And, Casey, we had excellent deposit growth in the quarter, and we're going into the fourth quarter, which is typically our best deposit growth quarter.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [34]

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Right. And then I wanted to follow up on that as well, Daryl. So yes, and when you talk about that, is it -- are you expecting a better mix seasonally of more DDI than CDs?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [35]

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Yes. But it's also a quarter where we see a lot of public funds come in as well.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [36]

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Got you. Okay. And then just lastly, on CECL, just so I'm thinking about -- I'm trying to quantify the dollar impact. So that 1:1.2 ACL, is that -- what is that -- what's the comparative ratio today? Is it just taking the loan-loss allowance of 1.46 and then the reserve for unfunded, which would -- which is about 69 basis points? Is that the right way -- is that the like-on-like number?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [37]

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Yes, that's correct. Oh, hey, Casey, one thing. Remember on the capital impact -- remember that, that onetime adjustment is phased in over a couple of years, right? So as we think about capital impact from that, it really is pretty de minimis just because of the way it gets phased in over a couple of years. So we'll not have an impact on our ability to continue to buy shares as we head into next year.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [38]

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Okay. So I mean, what kind of TCE ratio impact do you see as of March 31?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [39]

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Hold on. We'll come back to you at the end of the call on that one.

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Operator [40]

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(Operator Instructions)

Today's next question comes from Matt Olney of Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [41]

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I want to go back to the loan growth discussion. And can you just talk about the competition levels in your core markets? It seems like some of your bank peers have been growing their loan book a little bit slower, and they're highlighting irrational pricing, especially from some of the nonbanks. I'm curious what you're seeing in some of your core markets around loan growth.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [42]

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Michael?

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Michael J. Brown, IBERIABANK Corporation - Vice Chairman & COO [43]

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Yes. I mean clearly, we've been able to provide loan growth. Our credit quality is staying strong, so we're not dipping in terms of quality. And it's traditionally because we could connect to the people, have the right people in front of the right clients. Yes, it is a more competitive environment. Yes, the banks are more aggressive on structure and pricing has come in, but our view is on the long term, therefore the banking the right clients, and we're banking them on a relationship basis, which is our focus. We're going to pick up deposits, treasury management, wealth that rounded our relationship is going to provide the return we're looking for. So we're messaging to our people, yes, loan is more aggressive. It's reality. But this is the time to get clients in our mind, and if we get the full relationship, that's the best approach to use in terms of overall profitability.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [44]

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And Michael, I guess, sticking with the pricing discussion, is there any product or loan type that seemed to be getting more aggressive in your marketplaces than others?

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Michael J. Brown, IBERIABANK Corporation - Vice Chairman & COO [45]

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No, I wouldn't differentiate. I mean, I think it's generally across the board.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [46]

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Okay. Okay. That's helpful. And then as far as the fees, I think you highlighted in the discussion that you had $3 million gain on the sale of nonmortgage loans. Any more color you can provide on this? And will such sales continue?

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Michael J. Brown, IBERIABANK Corporation - Vice Chairman & COO [47]

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Matthew, I can give you some color. Where the loans that would come to us through acquisition didn't fit in with the portfolio that we have, it's not something that we traditionally have done. It just made sense to take advantage of frankly the market right now to sell them.

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [48]

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Yes. So, Matt, we sold things in the past, whether it was the reverse mortgage product that we had. Those loans actually went out at our -- on the books. We're at lower yields than stuff we could originate today. And so it just made sense to go ahead and let those go, sell those, take the gain, get us some capacity for loan growth. I will say it did truncate our loan growth numbers for the quarter. And so we've had really stout loan growth had we not gone ahead and done that. But we'll do that from time to time where it makes sense from a balance sheet perspective.

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Michael J. Brown, IBERIABANK Corporation - Vice Chairman & COO [49]

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And also, just linking back to the methodology I just described in terms of how we look at clients, they were transactional. There was absolutely nothing more we could do with a particular client in terms of the gain improving profitability and getting the returns we're looking for. So it just was a logical outcome.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [50]

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Okay. And so in terms of forecasting, it sounds like you don't think that should be in the run rate per se, but it could happen occasionally again over the next few quarters. Is that fair?

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Michael J. Brown, IBERIABANK Corporation - Vice Chairman & COO [51]

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Yes.

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [52]

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Yes, that's fair.

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Operator [53]

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Our next question today comes from Jennifer Demba of SunTrust.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [54]

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Follow-up question on the energy loan bucket. Jeff, what do you think you guys are doing different from your energy lender peers in this category? We've seen charge-offs go up in that bucket for almost everybody that's doing this lending as capital markets have tightened.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [55]

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Jenny, this is Daryl. I'll start and let Jeff take over because I think the first part of your question is what's different about us from a credit perspective than maybe others. And it really goes to the point Jeff made relative to a credit paying off 18 months ago. We have a very active portfolio management process in the company, and we tried to get way out ahead of issues from a credit perspective. And that's whether it's energy or some other part of the C&I book or the CRE book. We're always trying to be out in front from a portfolio management perspective in dealing with issues that we think are going to be problems down the road. Jeff?

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Jefferson Glenny Parker, IBERIABANK Corporation - Vice Chairman and Director of Capital Markets, Energy Lending & IR [56]

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Yes. Jennifer, I think one of the things I would add is, it's hard to quantify the value of having a team of people that have been together for a number of years. The person who actually runs this for us over in Houston has been with us for 10 years. And so we looked back, obviously, through the last cycle and had to make decisions about how do we proceed with the business that has been a good business for us and, by the way, generates a lot of ancillary positives in the form of treasury management and PCard and deposits. But we've been very, very careful and diligent in building this. We have, as I mentioned in the earlier question, it's no -- it's not by accident that we have a lot of the P/E-backed companies. So trying to maintain our liquidity numbers and leverage numbers and staying on top of that, as Daryl said a minute ago, canceling out where you need to do so. We've been -- we'll stay on top of that.

I will say this, Jennifer, we're seeing -- as you know, a lot of people will look at the price of oil, and say, "While oil is $54, everything's fine." But natural gas prices have been soft, and they were soft through the summer, and that has impacted natural gas credits. As we go through the redetermination period, we'll probably see -- we'll see certainly some borrowing basis reaffirmed, but we'll see reductions on some of the natural gas side. So I think that you've got to watch that side right now. People are speculating about how much risk migration might occur in here over the course of the year. But I think we're very comfortable. And as I said a minute ago, we went through that portfolio review recently and nothing new, whatsoever, in looking at over 90% of our portfolio.

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Michael J. Brown, IBERIABANK Corporation - Vice Chairman & COO [57]

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And if I could add, this maybe ties into Matt's question. That's an extremely profitable business for us. The reserve-based lending space has been good for us throughout the cycle and continues to be our top-returning business. There's obviously the risk component Jeff referred to, but we believe we can manage that risk and get an outsized return from that space based on the knowledge base we have as a company.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [58]

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Second question. Just curious, the environment has gotten tougher year-over-year for everybody with lower rates. Daryl, what's IBERIA's interest in acquisitions right now? And where do you see the M&A environment going over the next several quarters?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [59]

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Jenny, there was a lot of talk early in the year but not a lot of action. And really, I think the interest rate challenges are out there for everyone. And from our perspective, we're very focused on our earnings and kind of meeting that challenge. We like our franchise, and we like the opportunities that we have with our franchisers. As I've said earlier, in our markets and for our clients, the economy feels pretty good for them. And so we think we have plenty of opportunities from a loan and deposit growth perspective with the existing franchise.

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Operator [60]

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And our next question today comes from Christopher Marinac of Janney Montgomery Scott.

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Christopher William Marinac, Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst [61]

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Daryl and team, I want to ask about the digital bank and the kind of digital product offerings for commercial customers. How much more is needed there? How much more have you done? Just kind of curious if this is something that gets a lot of priority or is less.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [62]

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This will go back to Anthony because Anthony has got business transformation for us, and we're spending a lot of time thinking about those issues. Anthony?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [63]

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Yes, Chris, we actually recognize that the middle market commercial space is really what drives the engine for IBERIABANK. And so along with that, we recognize that the appropriate technology has got to be wrapped around that. So we started, call it, 2, 3 years ago really to make a big push to enhance. And we talked a lot about treasury management in terms of deeper offering, better offering, and that includes being able to do all that through electronic means. We then followed it up to really build out, I'll call it, our loan origination system. That project continues to evolve. We think that's going to be very impactful for us in a number of ways, on the cost side, speed to the customers, et cetera. And so it's not something that I'd say that we would declare victory on, but I think we feel really good. We've got a defined focus on where we're trying to get to, recognizing that if we wrap excellent technology around our excellent lenders, we're going to get excellent results. And so that's what our focus is.

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Michael J. Brown, IBERIABANK Corporation - Vice Chairman & COO [64]

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Yes. If I could add, I mean, from a treasury management perspective, we compete with larger institutions on a constant basis, and we win. So we think we can go toe-to-toe based upon a very good product set.

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Christopher William Marinac, Janney Montgomery Scott LLC, Research Division - Director of Research and Banks & Thrifts Analyst [65]

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Great. And the treasury piece is what I was going to ask, so thank you, Michael, for following up.

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [66]

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Yes. One quick thing, Casey, following back up on the TCE impact. I think if you look at the range from -- relative to the March 31, about 25 basis points if you just kind of straddle the range is what we think we'll see impact to the TCE relative to the CECL adoption.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [67]

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Are you done?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [68]

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Yes.

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Operator [69]

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All right. Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Daryl Byrd for any closing remarks.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [70]

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Marco, thank you. I want to thank everybody for joining us today and your confidence in our company. Everybody, have a great day and a great weekend. Thank you.

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Operator [71]

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And thank you, sir. This concludes today's conference. You may now disconnect your lines, and have a wonderful day.