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

Q2 2019 IBERIABANK Corp Earnings Call

LAFAYETTE Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of IBERIABANK Corp earnings conference call or presentation Friday, July 19, 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

* Nicolas Young

IBERIABANK Corporation - Executive VP & Chief Credit Officer

* Terry Lawson Akins

IBERIABANK Corporation - Senior EVP & Chief Risk Officer

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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

* Stephen Kendall Scouten

Sandler O'Neill + Partners, L.P., Research Division - MD, 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 Second 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'll 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 on 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 July 26. 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 strong results. We reported GAAP and core earnings per share of $1.86 and $1.87, respectively, an improvement on a linked-quarter basis of 6% and 9%. I also want to note that our core EPS of $1.87 was a record for the company. We increased revenues 4% or 15% annualized during the second quarter primarily from strong loan growth of stable net interest margin and noninterest income gains from both our mortgage and title businesses.

For the quarter and on a core basis, we achieved a 1.31% return on average assets, a 15.58% return on tangible common equity and a tangible efficiency ratio of 52%, all better than the 2020 Strategic Goal metrics. Loan growth continued to be solid in the second quarter as total loans increased $387 million or 7% on an annualized basis, reaching the top end of our 2019 guidance. Our Corporate Asset Finance team had a very good quarter, providing a significant portion of our overall loan growth along with both our mortgage and energy businesses.

Net interest margin for the quarter was 3.57% on a GAAP basis, relatively flat as compared to the first quarter and 3.37% on a cash basis. As anticipated, we realized approximately $7.2 million in recoveries this quarter, rebounding from the first quarter and in line with our previous expectations of approximately $5 million a quarter for 2019. As we mentioned in our first quarter release, we delevered approximately $424 million of securities in our bond portfolio in the second quarter as a result of a sale of $300 million in securities and expected cash flow payments.

As of the end of the second quarter, our investment portfolio was approximately 15% of total assets. We believe there is still some room to continue to efficiently delever this portfolio to fund future loan growth, allowing for an improved overall mix of higher-earning assets. Core noninterest income increased $7.3 million or 14% on a linked-quarter basis primarily due to a $6.6 million or 56% increase in mortgage income and a $1.7 million or 32% increase in title revenues. I'm very pleased with the performance of our mortgage group, as they have repositioned and improved the cost structure of that business over the last couple of years. I expect the performance of the mortgage business to remain strong and profitable throughout the remainder of 2019, given the strength of the pipeline and lower mortgage rates.

Core noninterest expense increased $8.3 million or 5% on a linked-quarter basis. As anticipated, salaries and benefits contributed approximately $5 million of this increase. This includes a $3.1 million increase in mortgage commission expense, a full quarter of merit increases and the impact of one additional business day in the quarter.

Our core tangible efficiency ratio remains strong for the quarter, coming in at 52%. The bank's credit metrics remain strong and stable. Classified assets continue to decrease and now represent 97 basis points of total assets, a reduction of 24% from a year ago. Provision expense was $10.8 million, down $3 million on a linked-quarter basis. Additionally, net charge-offs for the quarter were essentially flat at only 14 basis points of average loans. We continue to see no signs of credit deterioration in the loan portfolio.

During the second quarter, we issued and sold $100 million in depository shares related to our Series B perpetual preferred stock, our third such issue. The preferred stock has an initial coupon of 6.1% fixed for 5 years and then converts to LIBOR plus 386 basis points. Also during the quarter, we repurchased approximately 1.8 million common shares at a weighted average price of $76.59 per common share or approximately $135 million in total value. We have subsequently purchased an additional 117,000 shares early in the third quarter to complete the share repurchase plan announced in November 2018. 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. This plan is expected to be completed over the next year.

For the first 6 months, we've returned over a 100% of net income to common shareholders in the form of cash dividends and the repurchase of our common stock. Also earlier in the week, we announced another increase of $0.02 per share to our common dividend, as we declared a quarterly cash dividend on common stock equal to $0.45 per common share, payable on October 25, 2019. This equates to a 5% increase over the prior quarterly dividend. And total declared common dividends for 2019 will represent a 13% increase over the last year. To appropriately reflect the projected rate environment, we've revised our full year 2019 financial guidance to account for updated expectations of 2, 25 basis point cuts in the Federal Funds rate in 2019, one in July and one in September. We adjusted the net interest margin range down to 3.48% to 3.54%, reflecting the current market rate expectations. The range for average earning assets moved up slightly, as we anticipate coming in between $28.6 billion to $28.8 billion. Our noninterest income increased to a range of $222 million to $230 million, up on expectations of continued strength in our seasonal businesses.

We reduced and tightened our noninterest expense range to between $667 million and $677 million. We have been and continue to be diligently focused on the items we can control and believe our cost containment measures will allow us to comfortably achieve this range.

As I said last quarter, every fiscal quarter seems to produce changing economic views. We've gone from 2 rate increases for 2019, projected at the end of last year, to our current guidance, which now includes 2 rate cuts. The updated guidance targets a midpoint of $7.12. We continue to see opportunities for improvement as we believe deposit pricing has peaked, leading to an ability to improve pricing and deposit mix in the near term. We're also seeing strength in recruiting, which should aid loan growth and fee income in the second half of the year. As always, we continue to work towards achieving our long-term strategic goals while also committed to achieving our stated 2019 financial guidance.

As far as the M&A environment, our stance remains consistent with my prior remarks. We remain focused on enhancing our earnings, achieving our return metrics and delivering sustainable profitable growth. Our commitment to enhance shareholder value remains our priority, and we're open to evaluating opportunities both internally and externally to achieve these goals. As we closed the first half of 2019, I can say that I'm very pleased with our company's progress. I believe we are in incredible markets, providing best-in-class products to our exceptional clients. Our strong results are a reflection of our associates' dedication and hard work and our clients' confidence in us as their financial institution of choice.

At this time, I'll open the lines for questions. Roco?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Today's first question comes from Ebrahim Poonawala of Bank of America.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [2]

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So I was just wondering if -- Daryl or Anthony, I think just a little bit more color around the margin. So it makes sense in terms of the revised guidance given the forward curve, but if you could just talk to in terms of -- as the market evolves, like just the sensitivity of the balance sheet to the yield curve. What we should we pay -- be paying attention to as the rate environment evolves and as we sort of think about your margin, not just for the back half of the year but from our seat going into 2020? That would be extremely helpful.

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

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Ebrahim, I'll start and then turn it back to Anthony. I guess we're not surprised to see margin come up first this morning. And Ebrahim, one comment I would make and I think I've been pretty consistent. It's amazing to me, the volatility in the economic environment, where we are from 2 rate increases to 2 rate decreases, and we're seeing payroll data that's very strong and pretty hard for us to predict. And I would encourage all of you to be careful with that. Anthony, comments?

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

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Yes. I think -- Ebrahim, I think we've talked a lot about our balance sheet positioning as we kind of move through the year. So certainly, as we've kind of moved really from -- I'll call it, through May, we've seen a couple of things happen, right? We've seen LIBOR come in quite substantially. And so even today, LIBOR 2.30% is in -- a good 20 basis points below kind of where that -- where fed fund sits today, kind of reflecting the expectation that we do get that full cut today. So I don't know there's a whole lot that should be surprising relative to the margin this year. I think as we think about next year, I'll leave you just kind of with a few high-level thoughts. One is, first and foremost, we haven't provided any guidance yet for next year to Daryl's point. Every 60 to 90 days, we seem to be getting a different look and 180 days, a long way away. Obviously, as a company, we continue to pivot and adjust as best we can, given the never-ending environmental changes that we're looking at.

Certainly, we've started to take actions. I think you can see those in the balance sheet today. We're shifting the mix on earning assets to improve the yield. I think that will continue. We're seeing the positive impact of noninterest income on our businesses from lower rates. That also should continue if we see lower rates as projected. We continue to work very hard on the overall expense base, while still investing in the business. I think it's worth highlighting at least for this year, just looking at the second quarter versus the first quarter, we lowered the midpoint of the guide on the expense guide by about $10 million, despite the fact that we are going to have higher mortgage commissions and we are seeing some pretty nice recruiting opportunities, as Daryl mentioned in his comments.

We know that deposit rates are rolling over, particularly on the brokerage side. Those'll move with the curve. Wholesale funding will move with the curve. Ultimately, retail and customer deposits will follow. It's going to be a little bit of a slower pace, but they'll follow along. We're going to have good loan growth next year. We're seeing some great recruiting opportunity today, which should aid in that endeavor.

And I'll just tell everybody that if the Fed does cut us projected, right? We should see a positive sloping curve next year, which creates -- which will create options for us that don't exist today. Our technology investments over the last 2 or 3 years continue to drive efficiency, meaning we can do more without adding, which I think is great. And then finally, we still have flexibility within our capital stack to drive more share repurchases if we want to do that. So I think -- as I think about next year, I'll say, it's a long way away, and we recognize the potential headwinds that might be out there from a rate perspective. We certainly have started to position and change things internally to get prepared for a different rate environment. We'll mitigate where we can. Eventually, the biggest variable for us is going to be deposits not the core funding. And that will come lower if rates do move lower. And then look, we still got a lot of flexibility. And we're committed to controlling what we can control and delivering at least on the expectation that we've laid out.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [5]

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And then just, Daryl, I think you mentioned, be careful what you expect. Is that implying that you're seeing a fair amount of strength from a customer standpoint and in the local economies across your markets? Is that kind of the read into it?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [6]

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Yes. Ebrahim, I think we feel very good about our clients. Anthony mentioned it, Michael can mention it. But we've had some pretty unique recruiting opportunities recently, and we see that evolving into excellent client growth. And so we'd be very positive about the future.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [7]

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Got it. And just second question. There's been a fair amount of discussion with investors around your messaging on M&A and obviously, you've been pretty vocal about it over the last few quarters. Would love to hear your thoughts around just the nature of transaction that you think at this point you would engage in. You've been out of M&A for the last year. So would be helpful to just kind of remind us around what the key priorities are? What you're looking to achieve if at all you engage in some kind of transaction activity?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [8]

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Ebrahim, everybody is -- everybody has been talking after the more recent M&A transactions, and that includes us. As far as we're concerned, we're open to opportunities that would be complementary to our focus on enhancing earnings and returns and improving shareholder value. I can't tell you whether or not all the talk is a catalyst for M&A activity. It kind of remains to be seen. And MOEs are not easy. The social issues are difficult and the cultural issues are difficult. I guess to the point you're asking about, I'd say with conviction, we have no interest in hot premium deals. We will be disciplined. We see no reason to overpay for a transaction, but we've had the same view about overpaying for even loans or deposits. I think we have a clear picture to get our earnings and don't need to stretch for growth. And as I said, in the script, my current position is that we remain focused on enhancing our earnings and return metrics and delivering sustainable profitable growth.

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Operator [9]

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And our next question comes from Jennifer Demba of SunTrust.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [10]

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Okay. Ebrahim, took my question.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [11]

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Sorry, Jennifer.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [12]

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No, it's all right. So questions on credit. You guys comment -- your metrics remained great, you said everything looks very good to you in our your portfolio. I'm wondering if you're particularly cautious on anything you're seeing out there in the market right now. There've been a few energy issues. Just wondering what you are seeing in your energy portfolio? And you did mention that energy was one of your growth area this quarter.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [13]

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Yes, Jenny, I'll kind of start and let Nick and Terry kind of talk this one. We've made -- I'd like to think we've always been pretty good at credit, been pretty consistent. We've made, I think, excellent progress. From a classified asset perspective, we're down about 24% year-over-year. Energy has done well for us. I think we've been pretty thoughtful, our book is very E&P and midstream oriented. So we've been thoughtful about what we put together. And over the last couple of years, energy has done really well for us from a credit perspective. Nick, Terry, thoughts?

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Nicolas Young, IBERIABANK Corporation - Executive VP & Chief Credit Officer [14]

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Yes. So our energy portfolio continued to perform well. Still, we have been very careful in lending and focus on E&P and midstream. Our portfolio now is, for all oilfield services is only 7% of the total, down from 35% several years ago. Our NPLs are nearly 1.9% of the total energy portfolio. And we had no energy net charge-offs last year or actually since '17. So we feel very good and very strong about the energy portfolio in general.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [15]

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Yes. So that portfolio has performed really well for us. Terry, anything you'd add?

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Terry Lawson Akins, IBERIABANK Corporation - Senior EVP & Chief Risk Officer [16]

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Yes, just a couple of things. Jennifer, I would just say that we have clients where we have very good diversification and access to multiple sources of capital. We remain very disciplined in our pricing deck and enter into credits where the companies have strong cash flow and reasonable leverage. So I would just echo what Nick and Daryl said. We feel very good about our energy portfolio today.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [17]

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Okay. Just one more question for Anthony. Professional fees were up, just wondering how that number looks going forward?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [18]

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Yes. Jennifer, I think that number will be fairly consistent moving through the remainder of the year. There's a -- there's little bit of legal expense and some other things that came through this quarter. I don't view -- but anyway, to answer the question, I think [fair of these determinations]

Yes, that's incredible. You've got -- anyway, I would assume that number is largely flat as we kind of move through the end of the year. It'll bounce around a little bit, but it shouldn't do that much.

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Operator [19]

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And the next question comes from Catherine Mealor of KBW.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [20]

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Just a follow-up on the margin. I guess maybe first question is, how should we think, Anthony, about -- you mentioned it's $0.05 a quarter for -- you had a one rate cut. And as we -- do we think about that more for 2019 and before you can really aggressively lower deposit costs and moving into the 2020? Or is that $0.05 really what -- be a full rate cut plus and offsetting benefits on the deposit side?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [21]

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No. I would tell you -- I would probably think of that more of through the end of this year and maybe a little bit into the early next year, right? Things are going to evolve, Catherine, and we're going to have options and be able to pivot. And to your point, right, things are going to change a little bit. So I would -- again, we put that in there just because I knew I'd get asked, and so I just wanted to put it out there. But again, I would look at that more of a near term kind of number, not a -- not necessarily a long term kind of thing.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [22]

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Okay. That's helpful. And then as we think about your new NIM guidance, well -- for you to hit the low end of that guidance for the full year, I mean your margin is coming down pretty significantly in the back half of this year. What can -- can you talk about the range of that guidance, and what's an area we would see that full year 3.48%.

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [23]

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Yes. Look, what I would do is I'd prefer we maybe push you a little bit towards focusing on the midpoint of the guide as opposed to the lower end of the guide. The difference between the 2 has to do with consumer -- our deposit-related assumptions, recovery income, whether that kind of drives up loss at the end of the year and some other things. What I'll tell you is, I think we feel pretty good. We've got some good visibility and some nice recoveries for the second -- I mean for the third quarter already. And so at this point, again I would push you more towards the middle as opposed to focus on the bottom end.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [24]

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Great. Okay. And the recoveries, you still feel that, that $5 million a quarter range is a good level to model?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [25]

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Yes, I mean look, we talked about last quarter was $5 million per quarter, and we were, if you look at it, we're at $10.6 million for our year-to-date. So I think the magnitude of the recoveries feels good, but the timing always gets to be the bigger challenge. However, I can say that I know that we've got some recoveries already in for the third quarter. So again, I still feel good about the overall number for the year. We're going to have recoveries in the third quarter, and so we'll just have to see how it all plays out.

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Operator [26]

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

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [27]

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Just wanted to talk about noninterest income. So I guess I'm looking at the first half of the year and you guys were talking about strong mortgage pipelines. And obviously, there's some title income that goes along with that. So I guess why wouldn't you be with that backdrop, and assuming rates continue to stay low on the mortgage side? Why won't you come in towards the upper end of that guidance range? And I guess maybe what are the other factors that we should be thinking about there?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [28]

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Michael, I think we've got a pretty good chance to do that. We feel very good about our mortgage group. They've done a lot of work. They've kind of repositioned and become much more productive, much more efficient, and we're having a good year, back making pretty decent money. And I think we got a shot at coming in at the high end. Fernando, any comments on mortgage.

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Fernando Perez-Hickman, IBERIABANK Corporation - Vice Chairman & Director of Corporate Strategy [29]

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Well, I'll just add we've had a very strong first half of the year, and we expect the rest of the year to continue in that trend. We've continued to hire loan officers and continue to improve our back office, and we've used a fixed component of our cost. So bottom line, we are making money. We've made around over $3 million year-to-date in this business, and we expect the rest of the year to continue to be profitable.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [30]

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Okay.

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [31]

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One thing I'd add, certainly, to Daryl's point, right, I think the opportunity to be at the top end of the range is very good. I think one of the wild cards that's a little bit of a difference, right, we had some pretty good swap income in the first part of the year. And if you think about it, right, customers are swapping from an insurance perspective against the risk of rates rising on. And so in today's environment, I don't think too many people are worried about rising rates and the risk of being caught upside down. So we're going to see the natural slowdown in that. We'll still have swap income, but I think that's where our -- I'll call it the variable gets to be with us about exactly where we land. I do think that it is possible and probably even greater than 50%. We're probably up towards the upper end of the range.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [32]

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That's very helpful. And then conversely on expenses, you guys have mentioned some expense control efforts, can you just talk about some of those efforts and then maybe some areas where you're reinvesting some of that capital? It sounds like obviously hires on the mortgage front, but other efforts, if you could just outline, it'd be appreciated.

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [33]

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Yes. So look, we don't have a announced expense initiative. But certainly, I think from an internal focus, there's a lot of effort in terms of making sure that we're looking for opportunities to manage the expenses lower and worse case, try to just contain them at current levels. The greatest pressure we see is really salaries and expense just from competitive standpoint. And so I think you just got, I'll call it, hyperfocus on it within the company, which has really worked out well. But against that focus, right, we continue to invest. We've got some pretty big movements on our loan origination system. I think that's coming along nicely. We continue to invest there. We've got some new pricing tools that we've put in place to help us better take a look at pricing as we're making loans. We've deployed several instances of robotic processes automation within the bank. Those efforts are ramping up. And we're seeing some good results from that. So I think it's a lot of just a continuation of what we've been talking about, Mike, and nothing necessarily that stands out as a unique item, just kind of a follow-through from all the work last year just kind of continues into this year.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [34]

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Yes, Michael, as we talked in the first quarter, we've been very focused on expenses, and we continue to be and want to be as productive as a company as we possibly can be. Michael?

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Michael J. Brown, IBERIABANK Corporation - Vice Chairman & COO [35]

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Yes. I was going to add in that. I think what we were looking for -- more focused on was what we're doing to invest in revenue opportunities. At the same time, we're managing our expense structure. And I think what's important is we continue to recruit and hire as we sort of recraft the balance sheet or at least the loan part of the balance sheet, to continue sort of diversifying it. The example I like to focus on the most is one we've talked about in terms of impacting growth a great deal certainly in the last 6 to 9 months, which is our Corporate Asset Finance Group. It's our equipment lease and financing group. And as we've sort of driven that business into our markets, we found a significant number of opportunities with our client base and prospects who are very active with equipment purchases. That's diversifying our portfolio more into the C&I space, which gives us opportunities for noninterest income tied to Treasury Management, picking up some pretty deposits. It's a very, very good business for us and required an investment for us. That team has done a great job. We continue to hire at market level. We're seeing some great opportunities relative to relationship managers who are leading, let's say, larger institutions, and with them, they bring us some pretty attractive clients. So we continue to invest, relative to people and into our markets. Obviously, at the same time, we are continuing to assess talent and try to understand where the best investment or return on our investment was coming from and continue to focus on that.

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Operator [36]

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And our next question comes from Casey Haire of Jefferies.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [37]

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Wanted to touch on the loan growth guide. You guys did 5% to 7% this year. You guys are -- I mean halfway point to your 4%, you sounds pretty upbeat about what you're seeing in your footprint and borrow activity. Just wondering, I mean are you -- is that just a conservative guide? Or should we expect a more moderate pace of loan growth in the back half here?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [38]

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No. I think -- Casey, I think we'd be very positive about loan growth. So we got -- Michael's got a great pipeline, Michael, you want to talk?

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Michael J. Brown, IBERIABANK Corporation - Vice Chairman & COO [39]

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Yes, the thing I'm most excited about is the diversity tied to our pipeline. It's coming from a lot of different areas. We've consciously increased our focus, as I've noted in the last commentary about C&I. So it's a very significant contributor too as I expect that to continue. Our clients are continuing to invest. There's a lot of positive activity in the marketplace. We see some good opportunities on real estate. We're very careful from a risk perspective relative to that, considering where we are in that particular part of the cycle. Our Residential Mortgage business, which ties to our, sort of, high-net worth clients continues to be very strong. We've seen some weakness on home equity, that's typical as home equity rolls into the mortgage refinancing activity we're doing. But at the end of the day, it's a good mix of clients and really important, as I noted, is we're seeing noninterest opportunities tied to those clients. So from a relationship profitability perspective, we're thinking, we're making the right investments and getting pretty attractive return. And back to your point or question, we're pretty bullish about loan growth at this particular point.

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [40]

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Casey, I'll throw in one other comment, just remember that the guide assumes 2 rate cuts, right? And so what's the impact on that is really would be unknown how that impacts customer behavior and appetite for loans. I can tell you that after the rate cuts, I feel very confident, we would blow through the original guidance we laid out for the year. Loan growth would be phenomenal and things would be I think really rosy. And so -- again, you have to think about all that guidance against the backdrop -- and unfortunately the backdrop, from a market perspective, there's always a little bit of the disconnect and you see it between the equity and the debt markets today. But the backdrop -- so maybe think a little bit more cautious, which is why you see the guidance kind of remaining the same, which I think is appropriate to move it up. Despite the fact, if you annualize year-to-date, you'd be kind of closer to 8 and it'd above the range.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [41]

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Yes. Great. Great color. Anthony, and then just the securities portfolio, Daryl, you mentioned that you guys took it down this quarter, and it sounds like that's going to be -- you're going to continue to use that as a funding mechanism for loan growth. Just trying to get a sense for how aggressive you're going to be with this strategy? We're at 17% of earning assets, what's -- how much lower can we go from here?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [42]

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Yes. You want to go?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [43]

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No, no go ahead, Anthony.

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [44]

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Sorry, Casey, what I'll tell you is I think you should expect to at least see us continue that through the end of the year, and then we'll kind of reevaluate. I'm looking at something of approximately the bond portfolio to decline about $185 million per quarter. Obviously, that will move around depending on prepayment levels. But we've got at 15-ish percent today on total assets, right? That number can come down from that level. So again, at this point, I'd say, you should expect us to continue that process through the end of the year. Once we get to the end of the year, we'll kind of maybe reevaluate. We'll give you some -- maybe better color next quarter as we kind of think out a little bit ...

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [45]

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Yes, and Anthony, how about a quick comment on spreads and bonds?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [46]

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Look, the bond portfolio, Casey, when you look at it, we -- bond yields if we -- I'll call it the typical bond we buy today might yield us 2.40%. If we were to go buy that bond today, I'd be largely bar -- you tap in some type of wholesale funding to cover this, the liability side of that at something like 2.40%. And so there is just nothing there with the inverted curve that works for us. And so we built the bond portfolio up in a better time, and so now we can kind of live off of that cash flow, let that run down. We've got great loan growth, right? So it gives us the ability to really create a shift within the earning asset side to a higher-yielding asset. You see down the quarter, our average earning asset yield went up 2 basis points, which I think is phenomenal. And some of that is we're trying to do as much of these kind of things as we can to stabilize the margin.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [47]

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What I would in terms of the loan side is, as we're continuing to see yields from an origination perspective, they stay pretty much consistent, 1 quarter -- 2Q over 1Q.

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

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Spreads.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [49]

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Spreads, I am sorry. Yes.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [50]

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Yes. It all makes sense. And then just switching to the buyback. I'm just curious how you guys came up with the 1.6 million? Just some of the loan growth feels a little bit conservative, you guys were at 9% TCE, and as I roll forward to my model, you built very nicely on TCE into the upper 9s next year and with a modest, sort of, payout ratio. So I'm just trying to -- little color on as to how you arrived at 1.6 million shares?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [51]

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Jeff, you want to talk there?

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Jefferson Glenny Parker, IBERIABANK Corporation - Vice Chairman and Director of Capital Markets, Energy Lending & IR [52]

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Okay. We've been restacking the capital, as you know, and when we talked earlier in the year, we anticipated probably doing about $35 million per quarter. We saw the opportunity, as you know, highlighted both last quarter and this quarter, to take advantage of rates in the market, raise $100 million gross at a 6.1% rate. And frankly, while we're both investing in the company, investing in people, investing in technology, we see the ability to buy our stock back. So we raised that number, completed a program. And we initiated a new program. As it turns out, we've returned about 100-plus percent of earnings this year in the form of dividends and share repurchases. That number has been between 55% and 65% annually in the past couple of years. So we're managing our capital stack. We're managing our capital, and we're able to return capital to shareholders. So all in all, good

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [53]

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Casey, a couple of extra add-on points. One is on the 1.6 million, right, that I think in Daryl's commentary, we said we thought we'd get that completed within a year. Given the change in the capital rules that are -- I guess were announced last week, right? Prior approvals from regulatories are a lot easier to kind of deal with on a move-forward basis. So remember this is our 12th or so plan. We'll finish this one up at some point. And if we get there quick, well, we'll go with another one, right?. So there's no magic. But we can get lost in if there is any secret tea leaves to read at the 1.6 million. Just it's -- it was a number that was good for us that we put out. Daryl said, he thinks we'll get it done within a year. And when we do that, depending on the environmental condition the at that time, if we're going to do -- if we want to do more then we'll roll a new plan forward.

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Operator [54]

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And our next question comes from Stephen Scouten of Sandler O'Neill.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [55]

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I appreciate all the color here. I guess -- I'd love some additional clarity on what you think might happen with your deposit book? We do start to get a couple of these rate cuts. SunTrust and some others have kind of mentioned that the deposit base will probably be lower on the front end. We wouldn't get all the help we saw on the upside of that if rates come down. I'm wondering if you think there would be a similar phenomenon there for you all? And that there'd be a catch-up in 2020? Or kind of how you think the deposits would respond initially to more than 2 cuts?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [56]

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I think the first one is we do think with the rate cuts deposit pricing has peaked. Michael, you want to?

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

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Yes, I do think deposit pricing has peaked in the moment. I think that it's going to take a little bit of time to work its way through but, I mean I expect pricing to decline at a reasonable pace during the more third quarter into fourth quarter. We feel pretty comfortable with that Anthony?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [58]

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Yes. Look, I think you're already seeing kind of new CD pricing is kind of -- the bar for that's been set lower than where it was last quarter. The level of us having to exception price above the rate sheet is basically that's gone away. At some point, you should expect -- we expect deposit rates to go to -- it's ultimately going to be driven by competitiveness, and so a lot of people are talking about it. And so what I'll tell you is, I think the banks did a great job of holding on the way up, and so I hear a lot of banks talking about we're going to cut and go down. And so I'll tell you that I'm all in. We'll cut and go down with everybody else. But I do think it's going to take a little bit of time, and so I would say probably more towards the end of the third quarter is where you really start to see some movement from the customer deposit perspective.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [59]

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Very helpful.

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Michael J. Brown, IBERIABANK Corporation - Vice Chairman & COO [60]

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Good news is we have a lot of deposits that actually are tied to floating rates, so they should move pretty quickly thinking the institutional book we have. That happens immediately.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [61]

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Do you know the amount of that off-hand?

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

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$1.4 billion.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [63]

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Great. And then maybe thinking a little bit more about the loan growth. I know, Anthony, you mentioned you'd probably raise that guidance if it wasn't for the uncertainty created by potential rate cuts. But can you talk about what that -- what dynamics you think could be created there? I mean my first thought would be if rates go down, you might get higher payoffs, but you'd also have greater demand if the economies are really as strong as the underlying trends still seem to intimate. So can you give some commentary there maybe?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [64]

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Yes, Stephen, I think that's -- I think you just hit the wildcard, and we're all trying to kind of figure it that if you get these rate cuts, my suspicion would be that we'll have a pretty solid economy and a good solid economy will create opportunities for our clients, and that will end up giving us loan growth.

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Michael J. Brown, IBERIABANK Corporation - Vice Chairman & COO [65]

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Yes. I hope I'm not going to be repetitive, but I mean I think what we've tried to do is we've tried to step back and take a look at our business and try to grow it based upon, I call it, diversity gain or diversification, geographic as well as business as well as individual makeup of the book. I agree with you, I think lower rates might encourage some refi activity, particularly in the real estate business. But again, we've tried to diversify away from that over the last 18 months into businesses that are less interest-rate sensitive, meaning they're not going to refi energy loans because rates drop. But that'll create income for the bottom line. So I'm with Daryl. I think that we would expect to see an offsetting increase in activity with our clients and our prospects, which is very important add-on because that's where we're getting a lot of our growth is from bringing market share over from other banks. That's going to continue, we think, at a faster pace because of our investment and recruiting activity. We think that's going to offset whatever increase in refi activity, which will impact our real estate book. And in turn, we'll get reasonable growth in overall loan portfolio.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [66]

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And Stephen, I want to make sure we kind of underline Michael's comment. We are seeing some fairly interesting recruiting opportunities and feel really good about some of the talent that's coming into our company and the client opportunities that, that presents.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [67]

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Yes. That's helpful. And I guess maybe is there any additional detail you can give there? Is that geographical concentrated opportunity? Is that from dislocation from things like BB&T, SunTrust or any segments of your business or any kind of incremental color you can give around those opportunities?.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [68]

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Stephen, I think I want to be polite around this comment.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [69]

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Fair enough.

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

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And -- look, we've got -- we have a very diverse organization, and we have a pretty strong recruiting network in from the Carolinas all the way down to the Keys or across to Texas, and we lever those, our network of relationships from a recruiting perspective. And so it's across a number of different markets.

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Operator [71]

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And the next question comes from Matt Olney of Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [72]

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I want to go back to credit quality. And it looks like you improved the guidance on provision expense. Can you shed some more light on this? Was it driven by some specific credits that hailed in recent weeks? Or do you feel better about the overall economy? Just any color you can give on that?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [73]

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Yes, again, I must start, we do feel good about the overall economy. And we feel very good about our credit posture. And look, classified's probably, I think, maybe the biggest example of kind of crack in terms of the improvement in the portfolio. Nick, you got any thoughts there?

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Nicolas Young, IBERIABANK Corporation - Executive VP & Chief Credit Officer [74]

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No. I will echo what you said in the opening remarks that we don't see any sign of the deterioration in the portfolio. The credit quality remains strong, stable and trending in the good direction and no concerns in the economy in the short term.

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [75]

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Yes.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [76]

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And then just as a follow-up for Daryl. I think last quarter, seemed like you were anxious to get some type of preliminary guidance around 2020, the investment community. So at this point, when should we expect to see some kind of preliminary 2020 guidance?

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Daryl G. Byrd, IBERIABANK Corporation - President, CEO & Director [77]

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Matt, it's -- the issue gets to be and even though -- and we're proud that we've been able to meet and exceed the 2020 goals, but as we've said a couple of times this morning, we have been and continue to be concerned about the volatility of the economic environment, just keeps changing on us. And it's hard to come out with future-oriented goals until you can kind of get a pretty solid feeling about what kind of volatility we're going to see from an economic perspective. Again, we think we've had solid performance. We continue to improve the talent in the company and the client relationships. We're very focused on productivity. Like we've said a couple of times, we think deposit cost at peak, and we're working and trying to be on the best end of the ranges that we provided. But I'm struggling to want to put out longer term guidance in light of just the changing nature of the economic needs.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [78]

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Yes, and that's certainly understandable. Yes, I get that.

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Operator [79]

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And our next question 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 [80]

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I know that past rate cycles are kind of hard to compare to today, and the company has changed a lot. But is there a loan beta behavior or earning asset beta behavior that's kind of transferable to what you're seeing now, Anthony? And kind of how we expect the next several quarters play out?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [81]

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Chris, unfortunately there's not, only because the composition of our company is so different today as in the last upcycle that we got. And also rate, the last cutting cycle was dramatic, and I feel pretty confident in that. It's a little early but despite -- even if the Fed were to start moving rates to support the economy, it's different type of support they were trying to provide against the last cuts that we saw in 2008, 2009. So we're just different, we're so much larger and the composition of the balance sheet is different. I wouldn't -- I personally would not be comfortable drawing any correlations between what we saw a decade ago and today. I just -- I'd just be cautious not to do that.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [82]

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Okay. Is there any embedded sort of speed of turnover that you kind of think about as you kind of laid out this near-term guidance on how NIM is composed?

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [83]

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Speed of turnover relative to what?

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Matthew Covington Olney, Stephens Inc., Research Division - MD [84]

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Sort of the repricing of loans and earning assets as that sort of defines this range of margin with the 2 rate cuts.

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Anthony J. Restel, IBERIABANK Corporation - Vice Chairman & CFO [85]

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Look, that is based on our, I'll call it, our very detailed asset/liability model, which takes into account all of the contractual cash flow from all of the repricing of loans. We have prepayment assumptions built into that on the loan side as well. And so I don't -- we certainly -- I'm not going to but you wouldn't want me to get into the minutiae of all of the thousands of assumption that drive the asset/liability model. I think the best thing I can tell you, Chris, is that, I think that the guidances that we've presented, provides our best estimate of what we believe what happened, looking at all the assumptions, again, with the best light and the best information that we've got against those assumptions.

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Operator [86]

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And 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 [87]

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Thank you, Roco. I just wanted to tell everybody, I hope you have a great weekend. We appreciate your confidence in our company. And again, just have a great weekend. Thanks.

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Operator [88]

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Thank you, sir. Today's conference has now concluded. And we thank you all for attending today's presentation. You may now disconnect your lines.