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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

Commission File Number 0-25756

 

 

IBERIABANK Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Louisiana   72-1280718

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

200 West Congress Street

Lafayette, Louisiana

  70501
(Address of principal executive office)   (Zip Code)

(337) 521-4003

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Securities Exchange Act Rule 12b-2).

 

Large Accelerated Filer   x    Accelerated Filer   ¨
Non-accelerated Filer   ¨      Smaller Reporting Company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

At August 6, 2010, the Registrant had 26,863,272 shares of common stock, $1.00 par value, which were issued and outstanding.

 

 

 


Table of Contents

IBERIABANK CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

Part I.    Financial Information    Page

Item 1.

   Financial Statements (unaudited)    2
   Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009    2
   Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009    3
   Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2010 and 2009    4
   Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009    5
   Notes to Unaudited Consolidated Financial Statements    6

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    33

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    57

Item 4.

   Controls and Procedures    57
Part II.    Other Information   

Item 1.

   Legal Proceedings    58

Item 1A.

   Risk Factors    58

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    58

Item 3.

   Defaults Upon Senior Securities    58

Item 4.

   (Removed and Reserved)    58

Item 5.

   Other Information    58

Item 6.

   Exhibits    59
Signatures    60

 

1


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

IBERIABANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

 

     (unaudited)
June 30,

2010
    December 31,
2009
 

Assets

    

Cash and due from banks

   $ 93,531      $ 94,674   

Interest-bearing deposits in banks

     1,031,205        80,723   
                

Total cash and cash equivalents

     1,124,736        175,397   

Fed funds sold

     2,533        261,421   

Securities available for sale, at fair value

     1,441,994        1,320,476   

Securities held to maturity, fair values of $309,992 and $260,798, respectively

     305,629        260,361   

Mortgage loans held for sale

     114,914        66,945   

Loans covered by loss share agreement

     1,524,228        1,670,466   

Non-covered loans, net of unearned income

     4,236,322        4,113,899   
                

Total loans, net of unearned income

     5,760,550        5,784,365   

Allowance for loan losses

     (96,000     (55,768
                

Loans, net

     5,664,550        5,728,597   

FDIC loss share receivable

     822,858        1,034,734   

Premises and equipment, net

     195,464        137,426   

Goodwill

     227,080        227,080   

Other assets

     476,706        487,965   
                

Total Assets

   $ 10,376,464      $ 9,700,402   
                

Liabilities

    

Deposits:

    

Noninterest-bearing

   $ 820,254      $ 874,885   

Interest-bearing

     7,253,657        6,681,263   
                

Total deposits

     8,073,911        7,556,148   

Short-term borrowings

     199,969        263,351   

Long-term debt

     586,130        745,864   

Other liabilities

     218,625        180,824   
                

Total Liabilities

     9,078,635        8,746,187   
                

Shareholders’ Equity

    

Common stock, $1 par value - 50,000,000 shares authorized; 28,079,841 and 22,106,659 shares issued

     28,080        22,107   

Additional paid-in-capital

     953,256        632,086   

Retained earnings

     345,243        341,621   

Accumulated other comprehensive income

     29,159        22,416   

Treasury stock at cost - 1,214,298 and 1,359,441 shares, respectively

     (57,909     (64,015
                

Total Shareholders’ Equity

     1,297,829        954,215   
                

Total Liabilities and Shareholders’ Equity

   $ 10,376,464      $ 9,700,402   
                

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

2


Table of Contents

IBERIABANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(dollars in thousands, except per share data)

 

     For The Three Months Ended
June 30,
    For The Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Interest and Dividend Income

        

Loans, including fees

   $ 88,443      $ 49,012      $ 170,923      $ 97,511   

Mortgage loans held for sale, including fees

     959        1,058        1,554        2,040   

Investment securities:

        

Taxable interest

     11,022        9,704        22,343        19,313   

Tax-exempt interest

     1,094        1,002        2,224        2,006   

Other

     (301     198        1,793        425   
                                

Total interest and dividend income

     101,217        60,974        198,837        121,295   
                                

Interest Expense

        

Deposits

     26,010        16,816        49,065        34,660   

Short-term borrowings

     196        311        391        698   

Long-term debt

     4,872        5,571        10,036        11,374   
                                

Total interest expense

     31,078        22,698        59,492        46,732   
                                

Net interest income

     70,139        38,276        139,345        74,563   

Provision for loan losses

     12,899        7,783        26,100        10,815   
                                

Net interest income after provision for loan losses

     57,240        30,493        113,245        63,748   
                                

Noninterest Income

        

Service charges on deposit accounts

     6,376        5,479        12,277        10,751   

ATM/debit card fee income

     2,557        1,963        4,882        3,677   

Income from bank owned life insurance

     717        720        1,426        1,433   

Gain on sale of loans, net

     10,625        10,808        17,999        19,338   

Gain on acquisitions

     —          —          3,781        —     

Title income

     4,813        5,232        8,516        9,711   

Broker commissions

     1,671        1,000        2,883        2,215   

Other income

     3,945        6,828        7,293        8,634   
                                

Total noninterest income

     30,704        32,030        59,057        55,759   
                                

Noninterest Expense

        

Salaries and employee benefits

     39,578        26,652        75,390        50,879   

Occupancy and equipment

     8,121        5,781        15,714        11,413   

Franchise and shares tax

     916        922        1,496        1,602   

Communication and delivery

     2,377        1,523        4,764        3,120   

Marketing and business development

     1,482        1,075        2,938        1,860   

Data processing

     3,333        1,669        6,161        3,227   

Printing, stationery and supplies

     794        659        1,511        1,137   

Amortization of acquisition intangibles

     1,269        622        2,279        1,243   

Professional services

     4,209        1,394        7,746        2,669   

Other expenses

     13,696        9,517        24,776        16,456   
                                

Total noninterest expense

     75,775        49,814        142,775        93,606   
                                

Income before income tax expense

     12,169        12,709        29,527        25,901   

Income tax expense

     3,329        4,235        7,684        8,282   
                                

Net Income

   $ 8,840      $ 8,474      $ 21,843      $ 17,619   
                                

Preferred Stock Dividends

     —          —          —          (3,350
                                

Earnings Available to Common Shareholders - Basic

   $ 8,840      $ 8,474      $ 21,843      $ 14,269   
                                

Earnings Allocated to Unvested Restricted Stock

     (189     (250     (433     (414
                                

Earnings Available to Common Shareholders - Diluted

   $ 8,651      $ 8,224      $ 21,410      $ 13,855   
                                

Earnings per common share - Basic

   $ 0.33      $ 0.53      $ 0.89      $ 0.88   
                                

Earnings per common share - Diluted

   $ 0.33      $ 0.52      $ 0.88      $ 0.88   
                                

Cash dividends declared per common share

   $ 0.34      $ 0.34      $ 0.68      $ 0.68   
                                

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

3


Table of Contents

IBERIABANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

(dollars in thousands, except share and per share data)

 

    Preferred
Stock
    Common
Stock
  Additional
Paid-In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Treasury
Stock
    Total  

Balance, December 31, 2008

  $ 87,779      $ 17,677   $ 474,209      $ 218,818      $ 12,294      $ (76,569   $ 734,208   

Comprehensive income:

             

Net income

          17,619            17,619   

Change in unrealized gain on securities available for sale, net of taxes

            (3,756       (3,756

Change in fair value of derivatives used for cash flow hedges, net of taxes

            11,031          11,031   
                   

Total comprehensive income

                24,894   

Cash dividends declared, $.68 per share

          (10,936         (10,936

Preferred stock dividend and accretion

    99            (3,350         (3,251

Preferred stock redemption

    (87,878       (2,249           (90,127

Redemption of preferred stock warrant

        1,049              1,049   

Reissuance of treasury stock under management incentive plans, net of shares surrendered in payment, including tax benefit, 94,238 shares

        (677         2,560        1,883   

Common stock issued for vested restricted stock, net of shares forfeited

        (4,384         4,384        —     

Share-based compensation cost

        2,882              2,882   

Equity activity of joint venture

          (28         (28
                                                     

Balance, June 30, 2009

  $ —        $ 17,677   $ 470,830      $ 222,123      $ 19,569      $ (69,625   $ 660,574   
                                                     

Balance, December 31, 2009

  $ —        $ 22,107   $ 632,086      $ 341,621      $ 22,416      $ (64,015   $ 954,215   

Comprehensive income:

             

Net income

          21,843            21,843   

Change in unrealized gain on securities available for sale, net of taxes

            12,165          12,165   

Change in fair value of derivatives used for cash flow hedges, net of taxes

            (5,422       (5,422
                   

Total comprehensive income

                28,586   

Cash dividends declared, $.68 per share

          (18,221         (18,221

Reissuance of treasury stock under incentive compensation plans, net of shares surrendered in payment, including tax benefit, 51,048 shares

        (390         853        463   

Common stock issued

      5,973     323,007              328,980   

Common stock issued for recognition and retention plan, net of shares forfeited

        (5,253         5,253        —     

Share-based compensation cost

        3,806              3,806   
                                                     

Balance, June 30, 2010

  $ —        $ 28,080   $ 953,256      $ 345,243      $ 29,159      $ (57,909   $ 1,297,829   
                                                     

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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Table of Contents

IBERIABANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(dollars in thousands)

 

     For The Six Months  Ended
June 30,
 
     2010     2009  

Cash Flows from Operating Activities

    

Net income

   $ 21,843      $ 17,619   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     4,853        5,227   

Amortization of purchase accounting adjustments

     (38,602     684   

Provision for loan losses

     26,100        10,815   

Noncash compensation expense

     3,806        2,882   

Loss on sale of assets

     179        573   

Gain on sale of investments

     (983     (5,882

Gain on acquisitions

     (3,781     —     

Loss on abandonment of fixed assets/write downs

     —          154   

Amortization of premium/discount on investments

     6,297        779   

Derivative gains on swaps

     —          (115

Mortgage loans held for sale

    

Originations and transfers

     (734,506     (934,758

Proceeds from sales

     704,535        927,490   

Gain on sale of loans, net

     (17,999     (19,338

Cash retained from tax benefit associated with share-based payment arrangements

     (528     (685

FDIC reimbursement of recoverable covered asset losses

     238,747        —     

Decrease in other assets

     241,949        14,782   

Other operating activities, net

     (9,831     (146
                

Net Cash Provided by Operating Activities

     442,079        20,081   
                

Cash Flows from Investing Activities

    

Proceeds from sales of securities available for sale

     34,811        208,012   

Proceeds from maturities, prepayments and calls of securities available for sale

     276,530        151,256   

Purchases of securities available for sale

     (419,654     (483,757

Proceeds from maturities, prepayments and calls of securities held to maturity

     25,024        138,421   

Purchases of securities held to maturity

     (70,601     (184,165

Decrease (Increase) in loans receivable, net,

     35,094        (100,346

Proceeds from sale of premises and equipment

     367        8   

Purchases of premises and equipment

     (18,186     (4,624

Proceeds from disposition of real estate owned

     16,077        7,206   

Other investing activities, net

     (1,417     (1,295
                

Net Cash Used in Investing Activities

     (121,955     (269,284
                

Cash Flows from Financing Activities

    

Increase in deposits

     528,648        177,079   

Net change in short-term borrowings

     (63,382     48,751   

Proceeds from long-term debt

     39,417        —     

Repayments of long-term debt

     (188,769     (29,745

Dividends paid to common shareholders

     (16,142     (10,855

Preferred stock dividend paid

     —          (3,350

Proceeds from issuance of treasury stock for stock options exercised

     1,131        1,926   

Payments to repurchase common stock

     (1,196     (730

Common stock issued

     328,980        —     

Redemption of preferred stock

     —          (87,878

Redemption of preferred stock warrant

     —          (1,200

Cash retained from tax benefit associated with share-based payment arrangements

     528        685   
                

Net Cash Provided by Financing Activities

     629,215        94,683   
                

Net Increase (Decrease) in Cash and Cash Equivalents

     949,339        (154,520

Cash and Cash Equivalents at Beginning of Period

     175,397        345,865   
                

Cash and Cash Equivalents at End of Period

   $ 1,124,736      $ 191,345   
                

Supplemental Schedule of Noncash Activities

    

Acquisition of real estate in settlement of loans

   $ 12,041      $ 9,829   
                

Exercise of stock options with payment in company stock

   $ 48      $ —     
                

Supplemental Disclosures

    

Cash paid for:

    

Interest on deposits and borrowings

   $ 73,537      $ 48,757   
                

Income taxes, net

   $ 17,109      $ 14,099   
                

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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Table of Contents

IBERIABANK CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. These interim financial statements should be read in conjunction with the audited financial statements and note disclosures for IBERIABANK Corporation (the “Company”) previously filed with the Securities and Exchange Commission (the “SEC”) in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

The consolidated financial statements include the accounts of IBERIABANK Corporation and its wholly owned subsidiaries: IBERIABANK, IBERIABANK fsb, Lenders Title Company (“LTC”), and IBERIA Capital Partners LLC (“ICP”). All significant intercompany balances and transactions have been eliminated in consolidation. The Company offers commercial and retail banking products and services to customers throughout locations in six states through IBERIABANK and IBERIABANK fsb. The Company also operates mortgage production offices in twelve states through IBERIABANK fsb’s subsidiary, IBERIABANK Mortgage Company (“IMC”), and offers a full line of title insurance and closing services throughout Arkansas and Louisiana through LTC and its subsidiaries. Upon Financial Industry Regulatory Authority (“FINRA”) approval of its license, ICP will provide equity research, institutional sales and trading, and corporate finance services.

Certain amounts reported in prior periods have been reclassified to conform to the current period presentation. During the current period, the Company converted the former Orion Bank loan, deposit, and general ledger systems to the Company’s systems. In the process of conversion, the Company reviewed the acquired bank’s general ledger and noted some deposit products were not segregated between interest-bearing and noninterest-bearing general ledger accounts. Upon conversion, the Company has segregated these interest-bearing deposit accounts and has included these accounts in total interest-bearing deposits for the periods ended June 30, 2010 and December 31, 2009. As a result of the conversion, $110,368,000 of deposits at December 31, 2009 were reclassified and included in total interest-bearing deposits on the Company’s consolidated balance sheet at that date. The reclassification had no effect on previously reported total deposits, total liabilities, shareholders’ equity, net interest margin or income available to common shareholders.

All normal, recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the financial statements, have been included. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are susceptible to significant change in the near term are the allowance for loan losses, valuation of loans covered by loss sharing arrangements with the FDIC and the related loss share receivable, valuation of goodwill, intangible assets and other purchase accounting adjustments, and share-based compensation.

Note 2 – Recent Accounting Pronouncements

International Financial Reporting Standards (“IFRS”)

In November 2009, the SEC issued a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with IFRS. IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, the Company may be required to prepare financial statements in accordance with IFRS as early as 2014. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. The Company is currently assessing the impact that this potential change would have on its operating results and financial condition, and will continue to monitor the development of the potential implementation of IFRS.

Accounting Standards Update No. 2010-20

In July 2010, the FASB issued a final Accounting Standards Update (“ASU”) that requires the Company to provide extensive new disclosures in its financial statements. The proposed Statement is intended to improve the transparency of financial reporting by requiring enhanced disclosures about the Company’s allowance for credit losses as well as the credit quality of the Company’s loan portfolio.

The enhanced disclosures include disclosure of information that enables the users of the Company’s consolidated financial statements to understand the risk characteristics of the Company’s loan portfolio segments, the factors and methodologies used in estimating the Company’s allowance for loan losses for each portfolio, and the activity in both the loan balances and allowance for loan losses for each loan portfolio segment. Additionally, the disclosures include disclosing information by loan portfolio segment that enables users to assess

 

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Table of Contents

the fair value of the Company’s loans at the end of the reporting period, as well as assess the quantitative and qualitative risks arising from the credit quality of the Company’s loans. Suggested disclosures also include information that enables users to understand the accounting for, and amount of, loans that meet the definition of an impaired loan in Accounting Standards Codification (“ASC”) Topic 310, as well as loans that are on nonaccrual status. The ASU is effective beginning with the first interim or annual reporting period ending after December 15, 2010, with early application encouraged. Because the ASU enhances current disclosure requirements and does not represent a departure from current GAAP, issuance and adoption of the ASU will not affect the Company’s financial position, results of operations, or liquidity, but will require additional disclosures in the Company’s interim and annual consolidated financial statements.

ASU No. 2010-06

In January 2010, the Company adopted the provisions of ASU No. 2010-06, which provides amendments to ASC subtopic 820-10 that require new disclosures related to fair value measurements. The update requires new disclosures for transfers in and out of Levels 1 and 2 fair value measurements, as well as a description of the reasons for the transfers. In addition, the update requires enhanced disclosure of Level 3 fair value measurement activity, including disclosure of separate information for purchases, sales, issuances, and settlements of Level 3 measurements on a gross basis. Finally, the update provides amendments that clarify existing disclosures about the level of disaggregation of data and input and valuation techniques used to measure fair value on both a recurring and nonrecurring basis.

The additional disclosures required are incorporated in Note 9 in these interim consolidated financial statements.

Note 3 –Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share for the three- and six-month periods ended June 30, 2010 and 2009.

 

    For the Three Months  Ended
June 30,
 
    2010     2009  

Income available to common shareholders

  $ 8,840,000      $ 8,474,000   

Distributed and undistributed earnings to unvested restricted stock

    (188,000     (253,000
               

Distributed and undistributed earnings to common shareholders – Basic(1)

    8,652,000        8,221,000   

Undistributed earnings reallocated to unvested restricted stock

    (1,000     3,000   
               

Distributed and undistributed earnings to common shareholders – Diluted

  $ 8,651,000      $ 8,224,000   

Weighted average shares outstanding – Basic(3)

    26,804,334        16,044,634   

Weighted average shares outstanding – Diluted

    26,506,308        15,793,002   

Earnings per common share – Basic(1)

  $ 0.33      $ 0.53   

Earnings per common share – Diluted

  $ 0.33      $ 0.52   

Earnings per unvested restricted stock share – Basic (2)

  $ 0.35      $ 0.54   

Earnings per unvested restricted stock share – Diluted

  $ 0.35      $ 0.53   

 

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Table of Contents
    For the Six Months  Ended
June 30,
 
    2010     2009  

Income available to common shareholders

  $ 21,843,000      $ 14,269,000   

Distributed and undistributed earnings to unvested restricted stock

    (432,000     (422,000
               

Distributed and undistributed earnings to common shareholders – Basic(4 )

    21,411,000        13,846,000   

Undistributed earnings reallocated to unvested restricted stock

    (1,000     9,000   
               

Distributed and undistributed earnings to common shareholders – Diluted

  $ 21,410,000      $ 13,855,000   

Weighted average shares outstanding- Basic(6)

    24,549,042        16,012,016   

Weighted average shares outstanding- Diluted

    24,293,237        15,793,910   

Earnings per common share – Basic(4 )

  $ 0.89      $ 0.89   

Earnings per common share – Diluted

  $ 0.88      $ 0.88   

Earnings per unvested restricted stock share – Basic (5 )

  $ 0.87      $ 0.97   

Earnings per unvested restricted stock share – Diluted

  $ 0.87      $ 0.95   

 

(1) Total earnings available to common shareholders include distributed earnings of $8,940,000, or $0.34 per weighted average share, and an undistributed loss of $288,000, or $0.01 per weighted average share for the three months ended June 30, 2010. Total earnings available to common shareholders include distributed earnings of $5,324,000, or $0.34 per weighted average share, and undistributed earnings of $2,897,000, or $0.19 per weighted average share for the three months ended June 30, 2009.
(2)

Total earnings available to unvested restricted stock include distributed earnings of $194,000, or $0.36 per weighted average share, and an undistributed loss of $6,000, or $0.01 per weighted average share, under the two-class method for the three months ended June 30, 2010. Total earnings available to unvested restricted stock include distributed earnings of $164,000, or $0.35 per weighted average share, and undistributed earnings of $89,000, or $0.19 per weighted average share, under the two-class method for the three months ended June 30, 2009.

(3) Weighted average basic shares outstanding include 535,801 and 467,219 shares of unvested restricted stock for the three months ended June 30, 2010 and 2009, respectively.
(4) Total earnings available to common shareholders include distributed earnings of $17,870,000, or $0.74 per weighted average share, and undistributed earnings of $3,541,000, or $0.15 per weighted average share for the six months ended June 30, 2010. Total earnings available to common shareholders include distributed earnings of $10,612,000, or $0.68 per weighted average share, and undistributed earnings of $3,234,000, or $0.21 per weighted average share for the six months ended June 30, 2009.
(5) Total earnings available to unvested restricted stock include distributed earnings of $361,000, or $0.72 per weighted average share, and undistributed earnings of $72,000 or $0.14 per weighted average share, under the two-class method for the six months ended June 30, 2010. Total earnings available to unvested restricted stock include distributed earnings of $324,000, or $0.74 per weighted average share, and undistributed earnings of $99,000, or $0.23 per weighted average share, under the two-class method for the six months ended June 30, 2009.
(6) Weighted average basic shares outstanding include 498,286 and 435,936 shares of unvested restricted stock for the six months ended June 30, 2010 and 2009, respectively.

For the three-month periods ended June 30, 2010 and 2009, the calculations for basic shares outstanding exclude: (a) the weighted average shares owned by the Recognition and Retention Plan (“RRP”) of 556,551 and 499,221 respectively; and (b) the weighted average shares purchased in Treasury Stock of 1,254,757 and 1,600,024 respectively.

 

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For the six-month periods ended June 30, 2010 and 2009, the calculations for basic shares outstanding exclude: (a) the weighted average shares owned by the Recognition and Retention Plan (“RRP”) of 547,763 and 500,225 respectively; and (b) the weighted average shares purchased in Treasury Stock of 1,303,255 and 1,600,355 respectively.

The effect from the assumed exercise of 471,620 and 597,371 stock options was not included in the computation of diluted earnings per share for the three months ended June 30, 2010 and 2009, respectively, because such amounts would have had an antidilutive effect on earnings per share.

Note 4 – Acquisition Activity

FDIC-assisted Purchase and Assumptions of Assets and Liabilities of CapitalSouth Bank, Orion Bank, and Century Bank, FSB

IBERIABANK entered into three purchase and assumption agreements with loss share arrangements with the Federal Deposit Insurance Corporation (“FDIC”) as receiver during 2009. As part of these agreements, the FDIC also granted IBERIABANK an option to purchase at appraised value the premises, furniture, fixtures, and equipment of the acquired institutions and assume the leases associated with these offices.

On August 21, 2009, IBERIABANK acquired certain assets, assumed all of the deposits, and assumed certain other liabilities of CapitalSouth Bank, Birmingham, Alabama (“CSB”) from the FDIC in a whole-bank acquisition of CSB, a full-service commercial bank headquartered in Birmingham, Alabama. IBERIABANK now operates ten former CSB branches in four Metropolitan Statistical Areas (“MSAs”): Birmingham, Montgomery, and Huntsville, Alabama, and Jacksonville, Florida.

On November 13, 2009, IBERIABANK acquired certain assets and assumed certain deposit and other liabilities of Orion Bank (“Orion”) from the FDIC in a whole-bank acquisition of Orion, a full-service Florida-chartered commercial bank headquartered in Naples, Florida. IBERIABANK now operates 23 former Orion branches in five MSAs: Naples, Sarasota, Fort Myers, and Palm Beach, Florida, as well as the Florida Keys.

Also on November 13, 2009, IBERIABANK acquired certain assets and assumed certain deposit and other liabilities of Century Bank, FSB (“Century”) in a whole-bank acquisition of Century, a full-service federal thrift headquartered in Sarasota, Florida. IBERIABANK now operates 11 former Century branches in two Florida MSAs: Sarasota and Bradenton.

The acquisitions are accounted for under the purchase method of accounting in accordance with ASC Topic 805. The net assets acquired as of August 21, 2009 for CSB and November 13, 2009 for Orion and Century, as well as the gains recorded on the transactions (total equity as shown in the table), are presented in the following table. Both the purchased assets and liabilities assumed were recorded at their respective acquisition date fair values. Identifiable intangible assets, all of which represented core deposit intangible assets, were recorded at fair value. Because the fair value of assets acquired and intangible assets created as a result of the acquisitions exceeds the fair value of liabilities assumed, the provisions of ASC 805 allow the Company to record a gain resulting from the acquisitions in its consolidated statements of income for the year ended December 31, 2009 and the six months ended June 30, 2010. The gains totaled $231,122,000, of which $3,781,000 is included in noninterest income on the Company’s consolidated statements of income for the six months ended June 30, 2010. The gain in the current six-month period is a result of additional settlement items between the FDIC and the Company.

The loans and other real estate owned acquired are covered by loss share agreements between IBERIABANK and the FDIC which afford IBERIABANK significant protection against future losses. Under the agreements, the FDIC will cover 80% of losses on the disposition of loans and OREO up to certain thresholds presented in the following table, and 95% of losses that exceed these thresholds. The term for loss sharing on single-family residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years and IBERIABANK reimbursement to the FDIC for a total of eight years for recoveries. The reimbursable losses from the FDIC are based on the book value of the relevant loans as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by the provisions of the loss share agreements. As part of the agreements, IBERIABANK has recorded a receivable from the FDIC that represents the estimated fair value of the FDIC’s portion of the losses that are expected to be incurred and reimbursed to the Company. The following table also presents the value of the receivables at the respective acquisition dates.

 

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Table of Contents
(dollars in thousands)    Loss
Threshold
   80% of
Loss
Threshold
   Value of
Loss Share
Receivable

CapitalSouth

   $ 135,000    $ 108,000    $ 88,093

Orion

     550,000      440,000      711,756

Century

     285,000      228,000      232,053
                    

Total

   $ 970,000    $ 776,000    $ 1,031,902
                    

Subsequent to the acquisition, the adequacy of the allowance for loan losses for loans acquired in FDIC-assisted transactions is determined with consideration given to the amounts recoverable through loss sharing agreements (since the acquired loans were recorded at estimated recoverable amounts). The provision for loan losses on these covered assets represents expected losses above the losses inherent in the portfolio at acquisition.

Due to the significant fair value adjustments recorded, as well as the nature of the FDIC loss sharing agreements in place, CSB, Orion, and Century historical results are not believed to be relevant to the Company’s results, and thus no pro forma information is presented.

The acquired assets and liabilities are presented in the following table at fair value at each acquisition’s respective acquisition date. Cash acquired from the FDIC is included as a component of other assets to arrive at the total assets acquired.

 

(dollars in thousands)   CapitalSouth   Orion   Century   Total

Assets

       

Investment securities

  $ 46,027   $ 230,968   $ 22,128   $ 299,123

Loans

    363,117     961,094     417,561     1,741,772

Other real estate owned

    10,244     28,505     21,150     59,899

Core deposit intangible

    377     10,421     2,243     13,041

FDIC loss share receivable

    88,093     711,756     232,053     1,031,902

Other assets

    102,805     422,957     116,874     642,636
                       

Total Assets

  $ 610,663   $ 2,365,701   $ 812,009   $ 3,788,373

Liabilities

       

Interest-bearing deposits

    461,348     1,748,749     504,875     2,714,972

Noninterest-bearing deposits

    56,543     134,337     110,940     301,820

Borrowings

    30,619     344,690     143,006     518,315

Other liabilities

    4,916     15,642     1,586     22,144
                       

Total Liabilities

  $ 553,425   $ 2,243,418   $ 760,407   $ 3,557,251

Total Equity

    57,238     122,283     51,602     231,122
                       

Total Liabilities and Equity

  $ 610,663   $ 2,365,701   $ 812,009   $ 3,788,373
                       

 

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During the three- and six-month periods ended June 30, 2010, the Company paid $3,510,000 and $5,855,000 in merger-related expenses for the CSB, Orion, and Century acquisitions. These expenses included system conversion expenses, salaries and personnel costs of temporary employees, travel expenses, and legal and professional services. These costs were expensed as incurred and are included in noninterest expense on the Company’s statements of income. There were no similar identifiable costs associated with the same three- and six-month periods of 2009.

FDIC-assisted Purchase and Assumptions of Assets and Liabilities of Sterling Bank

On July 23, 2010, the Company announced it had entered into a purchase and assumption agreement with loss share arrangement with the FDIC to purchase certain assets and to assume certain deposit and other liabilities of Sterling Bank (“Sterling”), a Florida-chartered commercial bank headquartered in Lantana, Florida. See Note 14 to these consolidated interim financial statements for additional information on the Company’s purchase of Sterling Bank.

Note 5 – Loans

As discussed in Note 4 above, on August 21, 2009 the Company acquired substantially all of the assets and liabilities of CSB, and on November 13, 2009, acquired certain assets and assumed certain deposit and other liabilities of Orion and Century. The loans and foreclosed real estate that were acquired in these transactions are covered by loss share agreements between the FDIC and IBERIABANK, which affords IBERIABANK significant loss protection. Under the loss share agreement, the FDIC will cover 80% of covered loan and foreclosed real estate losses up to certain thresholds and 95% of losses that exceed those thresholds. Because of the loss protection provided by the FDIC, the risks of the acquired loans and foreclosed real estate are significantly different from those assets not covered under the loss share agreement. Accordingly, the Company presents loans subject to the loss share agreements as “covered loans” in the information below and loans that are not subject to the loss share agreements as “non-covered loans.”

Non-covered Loans

The following is a summary of the major categories of non-covered loans outstanding.

 

(dollars in thousands)

Non-covered Loans:

  June 30,
2010
  December 31,
2009

Residential mortgage loans:

   

Residential 1-4 family

  $ 406,762   $ 434,956

Construction/ Owner occupied

    23,251     18,198
           

Total residential mortgage loans

    430,013     453,154

Commercial loans:

   

Real estate

    1,723,108     1,659,844

Business

    1,154,548     1,086,860
           

Total commercial loans

    2,877,656     2,746,704

Consumer loans:

   

Indirect automobile

    268,936     259,339

Home equity

    517,286     512,087

Other

    142,431     142,615
           

Total consumer loans

    928,653     914,041
           

Total loans receivable

  $ 4,236,322   $ 4,113,899
           

Covered Loans

Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, exclusive of the shared-loss agreements with the FDIC. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows. At the time of acquisition, the Company estimated the fair value of the total acquired loan portfolio by segregating the total portfolio into loan pools with similar characteristics, which included:

 

   

whether the loan was performing according to contractual terms at the time of acquisition

 

   

the loan type based on regulatory reporting guidelines, namely whether the loan was a mortgage, consumer, or commercial loan

 

   

the nature of collateral

 

   

the interest rate type, whether fixed or variable rate

 

   

the loan payment type, primarily whether the loan was amortizing or interest-only

 

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From these pools, the Company used certain loan information, including outstanding principal balance, weighted average maturity, weighted average term to re-price (if a variable rate loan), weighted average margin, and weighted average interest rate to estimate the expected cash flow for each loan pool.

Over the life of the acquired loans, the Company continues to estimate cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics. The Company evaluates at each balance sheet date whether the present value of its loans determined using the effective interest rates has decreased and if so, recognizes a provision for loan loss in its consolidated statement of income. For any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life. During the three months ended June 30, 2010, the Company increased its allowance for loan losses $31,768,000 to reserve for estimated additional losses in a limited number of loan pools at June 30, 2010. The increase in the allowance was recorded by a charge to the provision for loan losses of $6,431,000 and an increase of $25,337,000 in its indemnification asset for the portion of the losses recoverable from the FDIC in accordance with the loss sharing agreements. In accordance with accounting principles, the allowance was not adjusted during the three- and six-month periods for a significant increase in cash flows previously expected to be collected.

The carrying amount of the acquired covered loans at June 30, 2010 consisted of loans determined to be impaired at the time of acquisition, which are accounted for in accordance with ASC Topic 310-30, and loans that were considered to be performing at the acquisition date, accounted for by analogy to ASC Topic 310-30, as detailed in the following table.

 

(dollars in thousands)

 

Covered Loans:

  Acquired
Impaired
Loans at
Acquisition
Date
  Acquired
Performing
Loans at
Acquisition
Date
  Total
Covered
Loans

Residential mortgage loans:

     

Residential 1-4 family

  $ 68,165   $ 292,575   $ 360,740

Construction/ Owner occupied

    —       —       —  
                 

Total residential mortgage loans

    68,165     292,575     360,740

Commercial loans:

     

Real estate

    29,549     732,172     761,721

Business

    13,639     180,029     193,668
                 

Total commercial loans

    43,188     912,201     955,389

Consumer loans:

     

Indirect automobile

    —       —       —  

Home equity

    17,995     186,991     204,986

Other

    1,391     1,722     3,113
                 

Total consumer loans

    19,386     188,713     208,099
                 

Total covered loans receivable

  $ 130,739   $ 1,393,489   $ 1,524,228
                 

The following is a summary of the covered loans acquired in the CSB, Orion, and Century acquisitions during 2009 as of the dates of acquisition.

 

(dollars in thousands)   Acquired
Impaired
Loans
    Acquired
Performing
Loans
    Total
Covered
Loans
 

Contractually required principal and interest at acquisition

  $ 643,527      $ 2,640,439      $ 3,283,966   

Nonaccretable difference (expected losses and foregone interest)

    (448,104     (1,065,604     (1,513,708
                       

Cash flows expected to be collected at acquisition

    195,423        1,574,835        1,770,258   

Accretable yield

    (5,917     (22,569     (28,486
                       

Basis in acquired loans at acquisition

  $ 189,506      $ 1,552,266      $ 1,741,772   
                       

 

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Table of Contents

The following is a summary of changes in the accretable yields of acquired loans during the six months ended June 30, 2010 and 2009.

 

(dollars in thousands)

 

June 30, 2010

   Acquired
Impaired
Loans
    Acquired
Performing
Loans
    Total
Acquired
Loan
Portfolio
 

Balance, beginning of year

   $ 5,072      $ 20,789      $ 25,861   

Additions due to acquisitions

     —          —          —     

Transfers from nonaccretable difference to accretable yield

     4,546        10,551        15,097   

Accretion

     (5,027     (14,011     (19,038
                        

Balance, end of period

   $ 4,591      $ 17,329      $ 21,920   
                        

(dollars in thousands)

 

June 30, 2009

   Acquired
Impaired
Loans
    Acquired
Performing
Loans
    Total
Acquired
Loan
Portfolio
 

Balance, beginning of year

   $ 317      $ —        $ 317   

Additions due to acquisitions

     —          —          —     

Transfers from nonaccretable difference to accretable yield

     —          —          —     

Accretion

     (44     —          (44
                        

Balance, end of period

   $ 273      $ —        $ 273   
                        

Loans within the scope of ASC 310-30 were specifically identified at acquisition and have been separately reviewed for nonperformance in subsequent accounting periods. Loans that were not within the scope of ASC 310-30 were segregated and reviewed for nonperformance at acquisition. In accordance with bank regulatory reporting standards, both acquired loans considered impaired at the time of acquisition and those performing at the time of acquisition that meet the Company’s definition of a nonperforming loan at each balance sheet date are included in total nonperforming loans at that date. All covered loans that are contractually past due will continue to be reported as past due based on the number of days past due.

Because the FDIC will reimburse the Company for certain acquired loans should the Company experience a loss, an indemnification asset is recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans, and measured on the same basis, subject to collectability or contractual limitations. The shared loss agreements on the acquisition date reflect the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties.

 

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Table of Contents

Allowance for Loan Losses

A summary of changes in the allowance for loan losses for the six months ended June 30, 2010 and 2009 is as follows:

 

    June 30, 2010  
    IBERIABANK              
(dollars in thousands)   Covered
Loans
    Non-
covered
loans
    IBERIABANK
fsb
    Total  

Balance, beginning of year

  $ 145      $ 34,286      $ 21,337      $ 55,768   

Provision for loan losses before benefit attributable to FDIC loss share agreements

    32,696        15,413        3,328        51,437   

Benefit attributable to FDIC loss share agreements

    (25,337     —          —          (25,337
                               

Net provision for loan losses

    7,359        15,413        3,328        26,100   

Increase in indemnification asset

    25,337        —          —          25,337   

Loans charged-off

    (1,094     (7,652     (5,850     (14,596

Recoveries

    11        1,855        1,525        3,391   
                               

Balance, end of period

  $ 31,758      $ 43,902      $ 20,340      $ 96,000   
                               
    June 30, 2009  
    IBERIABANK              
(dollars in thousands)   Covered
Loans
    Non-
covered
loans
    IBERIABANK
fsb
    Total  

Balance, beginning of year

  $ —        $ 26,671      $ 14,201      $ 40,872   

Provision for loan losses

    —          5,033        5,782        10,815   

Loans charged-off

    —          (2,296     (4,129     (6,426

Recoveries

    —          691        377        1,068   
                               

Balance, end of period

  $ —        $ 30,098      $ 16,231      $ 46,329   
                               

The following is a summary of nonperforming loans as of the dates indicated. The Company previously included covered loans in its nonperforming loans based on contractual past due status. The Company has revised its disclosure of nonperforming loans at December 31, 2009 to exclude covered loans. The Company revised this disclosure since interest income, through the accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all purchased loans accounted for under FASB ASC Topic 310-30. Due to the significant difference in the accounting for the covered loans and the loss sharing agreements with the FDIC, the Company believes that asset quality measures excluding the covered loans are generally more meaningful. Purchased impaired loans had evidence of deterioration in credit quality prior to acquisition, and thus the fair value of these loans as of the acquisition date included an estimate of credit losses. These loans, as well as acquired loans with no evidence of credit deterioration at acquisition, are accounted for on a pool basis, and these pools are considered to be performing. Purchased impaired loans were not classified as nonperforming assets at June 30, 2010 or December 31, 2009 as the loans are considered to be performing under FASB ASC Topic 310-30. As a result, interest income, through the accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all purchased loans accounted for under FASB ASC Topic 310-30. Therefore, management has included asset quality measures that exclude covered loans in the table in this section.

 

(dollars in thousands)   June 30,
2010
    December 31,
2009
 

Nonaccrual loans:

   

Commercial, financial and agricultural

  $ 37,087      $ 31,029   

Mortgage

    4,062        3,314   

Loans to individuals

    6,900        5,504   
               

Total nonaccrual loans

    48,049        39,847   

Accruing loans 90 days or more past due

    5,645        4,960   
               

Total nonperforming loans (1) 

    53,694        44,807   

OREO and foreclosed property

    15,214        15,281   
               

Total nonperforming assets (1)

    68,908        60,088   

Performing troubled debt restructurings

    2        —     
               

Total nonperforming assets and troubled debt restructurings (1)

  $ 68,910      $ 60,088   
               

Nonperforming loans to total loans (1)

    1.27     1.09

Nonperforming assets to total assets (1)

    0.91     0.91

Allowance for loan losses to nonperforming loans (1)

    119.64     124.14

Allowance for loan losses to total loans

    1.52     1.36

 

(1) Nonperforming loans and assets include accruing loans 90 days or more past due.

 

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Note 6 – Investment Securities

The amortized cost and fair values of investment securities, with gross unrealized gains and losses, consist of the following:

 

(dollars in thousands)   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
    Fair
Value

June 30, 2010

       

Securities available for sale:

       

U.S. Government-sponsored enterprise obligations

  $ 397,263   $ 3,365   $ (10   $ 400,618

Obligations of state and political subdivisions

    44,931     1,031     (646     45,316

Mortgage backed securities

    962,252     32,128     (1,286     993,094

Other securities

    2,882     84     —          2,966
                         

Total securities available for sale

  $ 1,407,328   $ 36,608   $ (1,942   $ 1,441,994
                         

Securities held to maturity:

       

U.S. Government-sponsored enterprise obligations

  $ 203,425   $ 2,627   $ —        $ 206,052

Obligations of state and political subdivisions

    65,107     1,111     (147     66,071

Mortgage backed securities

    37,097     772     —          37,869
                         

Total securities held to maturity

  $ 305,629   $ 4,510   $ (147   $ 309,992
                         

December 31, 2009

       

Securities available for sale:

       

U.S. Government-sponsored enterprise obligations

  $ 240,611   $ 1,156   $ (599   $ 241,168

U.S. Treasury securities

    4,998     1     —          4,999

Obligations of state and political subdivisions

    50,317     887     (744     50,460

Mortgage backed securities

    1,006,223     20,481     (5,765     1,020,939

Other securities

    2,878     32     —          2,910
                         

Total securities available for sale

  $ 1,305,027   $ 22,557   $ (7,108   $ 1,320,476
                         

Securities held to maturity:

       

U.S. Government-sponsored enterprise obligations

  $ 155,713   $ 123   $ (126   $ 155,710

Obligations of state and political subdivisions

    65,540     987     (288     66,239

Mortgage backed securities

    39,108     180     (439     38,849
                         

Total securities held to maturity

  $ 260,361   $ 1,290   $ (853   $ 260,798
                         

 

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Securities with carrying values of $1,241,004,000 and $1,210,189,000 were pledged to secure public deposits and other borrowings at June 30, 2010 and December 31, 2009, respectively.

Information pertaining to securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows.

 

    Less Than Twelve Months   Over Twelve Months   Total
(dollars in thousands)   Gross
Unrealized
Losses
    Fair
Value
  Gross
Unrealized
Losses
    Fair
Value
  Gross
Unrealized
Losses
    Fair
Value

June 30, 2010

           

Securities available for sale:

           

U.S. Government-sponsored enterprise obligations

  $ (10   $ 16,561   $ —        $ —     $ (10   $ 16,561

Obligations of state and political subdivisions

    (26     2,552     (620     2,590     (646     5,142

Mortgage backed securities

    (1,286     87,765     —          13     (1,286     87,778
                                         

Total securities available for sale

  $ (1,322   $ 106,878   $ (620   $ 2,603   $ (1,942   $ 109,481
                                         

Securities held to maturity:

           

U.S. Government-sponsored enterprise obligations

  $ —        $ 9,995   $ —        $ —     $ —        $ 9,995

Obligations of state and political subdivisions

    (139     6,921     (8     237     (147     7,158

Mortgage backed securities

    —          —       —          —       —          —  
                                         

Total securities held to maturity

  $ (139   $ 16,916   $ (8   $ 237   $ (147   $ 17,153
                                         

December 31, 2009

           

Securities available for sale:

           

U.S. Government-sponsored enterprise obligations

  $ (599   $ 51,228   $ —        $ —     $ (599   $ 51,228

Obligations of state and political subdivisions

    (35     7,137     (709     2,500     (744     9,637

Mortgage backed securities

    (5,765     317,222     —          22     (5,765     317,244
                                         

Total securities available for sale

  $ (6,399   $ 375,587   $ (709   $ 2,522   $ (7,108   $ 378,109
                                         

Securities held to maturity:

           

U.S. Government-sponsored enterprise obligations

  $ (126   $ 45,575   $ —        $ —     $ (126   $ 45,575

Obligations of state and political subdivisions

    (276     12,772     (12     234     (288     13,006

Mortgage backed securities

    (439     15,212     —          —       (439     15,212
                                         

Total securities held to maturity

  $ (841   $ 73,559   $ (12   $ 234   $ (853   $ 73,793
                                         

At June 30, 2010, 53 debt securities have unrealized losses of 1.62% of the securities’ amortized cost basis and 0.12% of the Company’s total amortized cost basis. The unrealized losses for each of the 53 securities relate principally to market interest rate changes. Five of the 53 securities have been in a continuous loss position for over twelve months. These five securities have an aggregate amortized cost basis and unrealized loss of $3,468,000 and $628,000, respectively. The five securities were issued by either Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) or by state and political subdivisions (Municipals) and were rated AAA or Aaa by Standard & Poor’s or Moody’s, respectively.

At December 31, 2009, 163 debt securities had unrealized losses of 1.8% of the securities’ amortized cost basis and 0.5% of the Company’s total amortized cost basis. The unrealized losses for each of the 163 securities relate principally to market interest rate

 

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changes. Six of the 163 securities have been in a continuous loss position for over twelve months. These six securities have an aggregate amortized cost basis and unrealized loss of $3,477,000 and $721,000, respectively. The securities were primarily issued by either Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) or by state and political subdivisions (Municipals) and were rated AAA or Aaa by Standard and Poor’s or Moody’s, respectively.

The Company has assessed the nature of the losses in its portfolio as of June 30, 2010 and December 31, 2009 to determine if there are losses that are deemed other-than-temporary. In its analysis of these securities, management considered numerous factors to determine whether there were instances where the amortized cost basis of the debt securities would not be fully recoverable, including, but not limited to:

 

   

the length of time and extent to which the fair value of the securities was less than their amortized cost,

 

   

whether adverse conditions were present in the operations, geographic area, or industry of the issuer,

 

   

the payment structure of the security, including scheduled interest and principal payments, including the issuer’s failures to make scheduled payments, if any, and the likelihood of failure to make scheduled payments in the future,

 

   

changes to the rating of the security by a rating agency, and

 

   

subsequent recoveries or additional declines in fair value after the balance sheet date.

Management believes it has considered these factors, as well as all relevant information available, when determining the expected future cash flows of the securities in question. In each instance, management has determined the cost basis of the securities would be fully recoverable. Management also has the intent and ability to hold debt securities until their maturity or anticipated recovery if the security is classified as available for sale. In addition, management does not believe the Company will be required to sell debt securities before the anticipated recovery of the amortized cost basis of the security. As a result of this analysis, no declines in fair value have been deemed to be other-than-temporary as of June 30, 2010 and December 31, 2009.

The amortized cost and estimated fair value by maturity of investment securities at June 30, 2010 are shown in the following table. Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments or call options. Accordingly, actual maturities may differ from contractual maturities.

 

     Securities
Available for  Sale
   Securities
Held to  Maturity
(dollars in thousands)    Weighted
Average
Yield
    Amortized
Cost
   Fair
Value
   Weighted
Average
Yield
    Amortized
Cost
   Fair
Value

Within one year or less

   1.50   $ 20,993    $ 22,084    4.23   $ 7,264    $ 7,309

One through five years

   2.03        305,909      309,145    2.14        207,367      210,173

After five through ten years

   3.47        444,606      460,146    4.33        15,503      15,818

Over ten years

   3.23        635,820      650,619    3.76        75,495      76,692
                                       

Totals

   3.01   $ 1,407,328    $ 1,441,994    2.70   $ 305,629    $ 309,992
                                       

 

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Gains or losses on securities sold are recorded on the trade date using the specific identification method. The following is a summary of realized gains and losses from the sale of securities classified as available for sale. Realized gains and losses from the sale of securities classified as held to maturity were not material.

 

     Three Months Ended June 30,     Six Months Ended June 30,  
(dollars in thousands)    2010    2009     2010    2009  

Realized gains

   $ 60    $ 5,897      $ 982    $ 5,899   

Realized losses

     —        (18     —        (18
                              

Net realized gains (losses)

   $ 60    $ 5,879      $ 982    $ 5,881   
                              

The following is a summary of the changes in other comprehensive income (“OCI”) as a result of investment portfolio activity.

 

    Six Months Ended  
(dollars in thousands)   June 30, 2010     June 30, 2009  

Balance at beginning of year, net

  $ 10,376      $ 12,969   

Unrealized gain (loss) on securities available for sale

    19,698        102   

Reclassification adjustment for net (gains) losses realized in net income

    (982     (5,881
               

Net unrealized gain (loss)

    18,716        (5,779

Tax effect

    6,551        (2,023
               

Net of tax change

    12,165        (3,756
               

Balance at end of period, net

  $ 22,541      $ 9,212   
               

Note 7 – Share-based Compensation

The Company has various types of share-based compensation plans. These plans are administered by the Compensation Committee of the Board of Directors, which selects persons eligible to receive awards and determines the number of shares and/or options subject to each award, the terms, conditions and other provisions of the awards. See Note 16 of the Company’s consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 for additional information related to these share-based compensation plans.

 

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Stock Option Plans

The Company uses the Black-Scholes option pricing model to estimate the fair value of share-based awards with the following weighted-average assumptions for the indicated periods.

 

    For the Three Months Ended June 30,     For the Six Months Ended June 30,  
    2010     2009     2010     2009  

Expected dividends

    2.3     2.1     2.3     2.1

Expected volatility

    32.0     24.1     31.0     24.1

Risk-free interest rate

    3.7     4.5     4.0     4.6

Expected term (in years)

    6.0        7.0        6.2        7.0   

Weighted-average grant-date fair value

  $ 16.25      $ 15.31      $ 16.06      $ 15.36   

The assumptions above are based on multiple factors, including historical stock option exercise patterns and post-vesting employment termination behaviors, expected future exercise patterns, and the expected volatility of the Company’s stock price.

At June 30, 2010, unrecognized compensation cost related to stock options of $5,939,000 is expected to be recognized over a weighted-average period of 5.0 years.

The following table represents the compensation expense that is included in salaries and employee benefits expense in the accompanying consolidated statements of income related to stock options for the periods indicated below.

 

(dollars in thousands)   For the Three Months Ended June 30,   For the Six Months Ended June 30,
    2010   2009   2010   2009

Compensation expense related to stock options

  $ 325   $ 182   $ 581   $ 351

The following table represents stock option activity for the six months ended June 30, 2010.

 

    Number of
shares
    Weighted
average
exercise

price
  Weighted
average
remaining

contract life

Outstanding options, December 31, 2009

  1,259,874      $ 43.05  

Granted

  118,366        59.80  

Exercised

  (51,048     22.16  

Forfeited or expired

  (716     57.87  
               

Outstanding options, June 30, 2010

  1,326,476      $ 45.34   5.0 Years
               

Outstanding exercisable, June 30, 2010

  937,661      $ 40.62   3.7 Years
               

The Company reported $528,000 and $685,000 of excess tax benefits as financing cash inflows during the first six months of 2010 and 2009, respectively. Net cash proceeds from the exercise of stock options were $1,131,000 and $1,926,000 for the six months ended June 30, 2010 and 2009, respectively.

There were 307,371 shares available for future stock option grants to employees and directors under existing plans at June 30, 2010. At June 30, 2010, the aggregate intrinsic value of shares underlying outstanding stock options and exercisable stock options was $11,269,000 and $11,111,000, respectively. The total intrinsic value of options exercised was $1,845,000 for the six months ended June 30, 2010.

Restricted Stock Plans

The share-based compensation plans allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned share-based compensation related to these awards is being amortized to compensation expense over the vesting period (generally three to seven years). The share-based compensation expense for these awards was determined based on the market price of the Company’s common stock at the date of grant applied to the total number of shares granted, amortized over the vesting period. As of June 30, 2010, unearned share-based compensation associated with these awards totaled $26,857,000.

 

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The following table represents the compensation expense that was included in salaries and employee benefits expense in the accompanying consolidated statements of income related to restricted stock grants for the periods indicated below.

 

(dollars in thousands)   For the Three Months Ended June 30,   For the Six Months Ended June 30,
    2010   2009   2010   2009

Compensation expense related to restricted stock

  $ 1,568   $ 1,212   $ 2,962   $ 2,330

The following table represents unvested restricted stock activity for the periods indicated.

 

     For the Six Months Ended June 30,  
     2010     2009  

Balance, beginning of year

   550,518      414,788   

Granted

   114,467      146,382   

Forfeited

   (3,133   (4,567

Earned and issued

   (92,104   (75,435
            

Balance, end of period, respectively

   569,748      481,168   
            

Phantom Stock Awards

As part of the 2009 Incentive Compensation Plan and 2009 Phantom Stock Plan, the Company issues phantom stock awards to certain key officers and employees.

The following table represents share and dividend equivalent share award activity during the six months ended June 30, 2010 and 2009.

 

    Number of
share
equivalents
    Dividend
equivalents
    Total share
equivalents
    Value of  share
equivalents(1)
 

Balance, December 31, 2008

  34,947      402      35,349      $ 1,393,000   

Granted

  9,138      646      9,784        386,000   

Forfeited share equivalents

  —        —        —          —     

Vested share equivalents

  —        —        —          —     
                         

Balance, June 30, 2009

  44,085      1,048      45,133      $ 1,779,000   
                         

Balance, December 31, 2009

  67,361      1,886      69,247      $ 3,565,000   

Granted

  48,467      1,307      49,774        2,562,000   

Forfeited share equivalents

  —        —        —          —     

Vested share equivalents

  (1,107   (65   (1,172     (60,000
                         

Balance, June 30, 2010

  114,721      3,128      117,849      $ 6,067,000   
                         

 

(1) Value of share equivalents is calculated based on the market price of the Company’s stock at the end of the respective periods. The market price of the Company’s stock was $51.48 and $39.41 on June 30, 2010 and 2009, respectively.

During the six months ended June 30, 2010 and 2009, the Company recorded $98,000 and $100,000, respectively, in compensation expense based on the number of share equivalents vested at the end of the period and the current market price of $51.48 and $39.41 per share of common stock. 1,172 shares vested during the six months ended June 30, 2010. There were no awards vested during the six months ended June 30, 2009 according to the vesting provisions of the plan and thus no cash payments were made to award recipients.

Note 8 – Goodwill and Other Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with ASC Topic 350. Under these rules, goodwill and other intangible assets deemed to have indefinite lives, such as title plant assets, are not amortized, but are subject to annual impairment tests. Other intangible assets are amortized over their useful lives. The Company will perform its annual goodwill impairment test during the fourth quarter of 2010. Management is not aware of any events or changes in circumstances since the previous impairment test that would indicate that goodwill might be impaired.

 

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As a result of a decrease in operating revenue and income at the Company’s LTC subsidiary, during the fourth quarter of 2009, the Company determined that it was more likely than not that the fair value of LTC may have been reduced below its carrying amount. To estimate the fair value, the Company used a discounted cash flow model derived from internal five-year cash flow estimates with a terminal value based on estimated future growth rates. The fair value estimate indicated that the carrying amount of the LTC subsidiary exceeded its estimated fair value. As a result, Step 2 testing was required for this reporting unit. The Company determined, as a result of the Step 2 analysis, that the goodwill allocated to LTC was partially impaired, primarily due to a decrease in expected cash flows for LTC. During 2009, the Company recorded a non-cash goodwill impairment charge of $9,681,000, representing 52.6% of total LTC goodwill.

Goodwill is allocated to the Company’s reportable segments as follows:

 

(dollars in thousands)    June 30, 2010    December 31, 2009

IBERIABANK

   $ 93,410    $ 93,410

IBERIABANK fsb

     113,392      113,392

IBERIABANK Mortgage Company

     11,550      11,550

Lenders Title Company

     8,728      8,728
             

Balance, end of period

   $ 227,080    $ 227,080
             

The Company had title plant assets totaling $6,722,000 at June 30, 2010 and 2009. The Company will perform its annual title plant intangible impairment test during the fourth quarter of 2010. The impairment test in 2009 indicated no impairment of its recorded title plant assets. Management is not aware of any events or changes in circumstances since the test of the title plant assets that would indicate the assets might be impaired.

The Company records other amortizable intangible assets that consist of core deposit intangibles, mortgage servicing rights, and non-compete agreements. The following table summarizes the Company’s intangible assets subject to amortization.

 

     June 30, 2010    December 31, 2009
(dollars in thousands)    Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount

Core deposit intangibles

   $ 37,831    $ 13,768    $ 24,063    $ 37,831    $ 11,489    $ 26,342

Non-compete agreements

     18      18      —        18      18      —  

Mortgage servicing rights

     373      138      235      331      102      229
                                         

Total

   $ 38,222    $ 13,924    $ 24,298    $ 38,180    $ 11,609    $ 26,571
                                         

The amortization expense related to core deposit intangibles for the six months ended June 30, 2010 and 2009 was $2,279,000 and $1,243,000, respectively.

Note 9 – Fair Value Measurements

On January 1, 2009, the Company adopted the provisions of ASC Topic 820 and ASC 825. ASC Topic 820 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

   

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

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Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

A description of the valuation methodologies used for instruments measured at fair value follows, as well as the classification of such instruments within the valuation hierarchy.

Securities available for sale

Securities are classified within Level 1 where quoted market prices are available in an active market. Inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are unavailable, fair value is estimated using pricing models or quoted prices of securities with similar characteristics, at which point the securities would be classified within Level 2 of the hierarchy. Examples may include certain collateralized mortgage and debt obligations. The Company’s portfolio does not include Level 3 securities as of June 30, 2010.

Mortgage loans held for sale

As of June 30, 2010, the Company has $114,914,000 of conforming mortgage loans held for sale. Mortgage loans originated and held for sale are carried at the lower of cost or estimated fair value. The Company obtains quotes or bids on these loans directly from purchasing financial institutions. Typically these quotes include a premium on the sale and thus these quotes indicate the fair value of the held for sale loans is greater than cost. At June 30, 2010, the entire balance of $114,914,000 is recorded at cost.

Impaired Loans

Loans are measured for impairment using the methods permitted by ASC Topic 310. Fair value of impaired loans is measured by either the loans obtainable market price if available (Level 1), the fair value of the collateral if the loan is collateral dependent (Level 2), or the present value of expected future cash flows, discounted at the loans effective interest rate (Level 3). Fair value of the collateral is determined by appraisals or independent valuation.

Other Real Estate Owned (OREO)

As of June 30, 2010, the Company has $45,843,000 in OREO and foreclosed property, which includes all real estate, other than bank premises used in bank operations, owned or controlled by the Company, including real estate acquired in settlement of loans. Properties are recorded at the balance of the loan or at estimated fair value less estimated selling costs, whichever is less, at the date acquired. Fair values of OREO at June 30, 2010 are determined by sales agreement or appraisal, and costs to sell are estimated based on the terms and conditions of the sales agreement or estimated costs associated with typical real estate transactions. Inputs include appraisal values on the properties or recent sales activity for similar assets in the property’s market, and thus OREO measured at fair value would be classified within Level 2 of the hierarchy. In accordance with the OREO treatment described, the Company included property writedowns of $1,582,000 and $1,907,000 in earnings for the three- and six-month periods ended June 30, 2010, respectively. Writedowns of $664,000 and $1,632,000 were recorded for the three and six months ended June 30, 2009, respectively.

Derivative Financial Instruments

The Company utilizes interest rate swap agreements to convert a portion of its variable-rate debt to a fixed rate (cash flow hedge). For derivatives designated as hedging the exposure to changes in the fair value of an asset or liability (fair value hedge), the gain or loss is recognized in earnings in the period of change, together with the offsetting gain or loss to the hedged item attributable to the risk being hedged. Earnings will be affected to the extent to which the hedge is not effective in achieving offsetting changes in fair value. For derivatives designated as hedging exposure to variable cash flows of a forecasted transaction (cash flow hedge), the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings or when the hedge is terminated. The ineffective portion of the gain or loss is reported in earnings immediately. For derivatives that are not designated as hedging instruments, changes in the fair value of the derivatives are recognized in earnings immediately.

In applying hedge accounting for derivatives, the Company establishes a method for assessing the effectiveness of the hedging derivative and a measurement approach for determining the ineffective aspect of the hedge upon the inception of the hedge.

Changes in the fair value of interest rate swaps associated with the Company’s trust preferred securities are recorded as noninterest income. Fair value is estimated using pricing models of derivatives with similar characteristics, at which point the derivatives are classified within Level 2 of the hierarchy.

The Company enters into commitments to originate loans whereby the interest rate on the prospective loan is determined prior to funding (“rate lock commitments”). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value as derivative assets or liabilities, with changes in fair value recorded in net gain or loss on sale of mortgage loans. Fair value of the interest rate lock commitments are estimated using pricing models of financial instruments with similar characteristics, and thus the commitments are classified within Level 2 of the fair value hierarchy.

 

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Beginning in the second quarter of 2010, IBERIABANK offers its customers a certificate of deposit that provides the purchaser a guaranteed return of principal at maturity plus potential equity return, which allows IBERIABANK to identify a known cost of funds. The rate of return is based on the performance of the S&P 500 stock index. Because it is based on an equity index, the rate of return represents an embedded derivative that is not clearly and closely related to the host instrument. ASC Topic 815 therefore requires the certificate of deposit be separated into two components: a zero coupon certificate of deposit (the host instrument) and a written option purchased by the depositor (an embedded derivative). The discount on the zero coupon deposit is amortized over the life of the deposit, and the written option is carried on the Company’s consolidated balance sheet at fair value, with changes in fair value recorded through earnings. IBERIABANK offsets the risks of the written option by purchasing an option with terms that mirror the written option that is also carried at fair value on the Company’s consolidated balance sheet at fair value. At June 30, 2010, the Company had equity-indexed certificates of deposit of $11,399,000 with offsetting written options having a notional amount of $11,399,000.

The Company’s adoption of ASC Topic 820 did not have a material impact on its consolidated financial statements. The Company has segregated all financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.

 

Recurring Basis       Fair Value Measurements at June 30, 2010 Using

(dollars in thousands)

 

Description

  June 30, 2010   Quoted Prices in
Active Markets for
Identical Assets

(Level 1)
  Significant
Other  Observable
Inputs

(Level 2)
  Significant
Unobservable
Inputs

(Level3)

Assets

       

Available-for-sale securities

  $ 1,441,994   $ 94,977   $ 1,347,017   $ —  

Derivative instruments

    30,940     —       30,940     —  
                       

Total

  $ 1,472,934   $ 94,977   $ 1,377,957   $ —  
                       

Liabilities

       

Derivative instruments

  $ 20,760   $ —     $ 20,760   $ —  
                       

Total

  $ 20,760   $ —     $ 20,760   $ —  
                       

Gains and losses (realized and unrealized) included in earnings (or changes in net assets) for the first six months of 2010 are reported in noninterest income or other comprehensive income as follows:

 

(dollars in thousands)   Noninterest
income
  Other
comprehensive
income

Total gains (losses) included in earnings (or changes in net assets)

  $ 983   $ —  

Change in unrealized gains (losses) relating to assets still held at June 30, 2010

  $ —     $ 6,743

 

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The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.

 

Nonrecurring Basis       Fair Value Measurements at June 30, 2010 Using

(dollars in thousands)

 

Description

  June 30, 2010   Quoted Prices in
Active Markets for
Identical Assets

(Level 1)
  Significant
Other  Observable
Inputs

(Level 2)
  Significant
Unobservable
Inputs

(Level3)

Assets

       

Loans

  $ 15,937   $ —     $ 15,937   $ —  

OREO

    1,688     —       1,688     —  
                       

Total

  $ 17,625   $ —     $ 17,625   $ —  
                       

In accordance with the provisions of ASC Topic 310, the Company records loans considered impaired at their fair value. A loan is considered impaired if it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Fair value is measured at the fair value of the collateral for collateral-dependent loans. Impaired non-covered loans with an outstanding balance of $21,690,000 were recorded at their fair value at June 30, 2010. These loans have a reserve of $5,753,000 included in the Company’s allowance for loan losses.

Assets acquired and liabilities assumed as part of the CSB, Orion, and Century acquisitions, discussed further in Note 4 to these consolidated financial statements, were recorded at their fair value upon acquisition in accordance with generally-accepted accounting principles and were not re-measured during the period subsequent to acquisition.

ASC Topic 825 provides the Company with an option to report selected financial assets and liabilities at fair value. The fair value option established by this Topic permits the Company to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each reporting date subsequent to implementation.

The Company has currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States, and as such has not included any gains or losses in earnings for the three- and six-month periods ended June 30, 2010 and 2009.

Note 10 – Derivative Financial Instruments

In the course of its business operations, the Company is exposed to certain risks, including interest rate, liquidity, and credit risk. The Company manages its risks through the use of derivative financial instruments, primarily through management of exposure due to the receipt or payment of future cash amounts based on interest rates. The Company’s derivative financial instruments manage the differences in the timing, amount, and duration of expected cash receipts and payments.

The Company accounts for its derivative financial instruments in accordance with ASC Topic 815, which requires that all derivatives be recognized as assets or liabilities in the balance sheet at fair value.

The primary types of derivatives used by the Company include interest rate swap agreements, options, and interest rate lock commitments.

Interest Rate Swap Agreements

As part of its activities to manage interest rate risk due to interest rate movements, the Company has engaged in interest rate swap transactions to manage exposure to interest rate risk through modification of the Company’s net interest sensitivity to levels deemed to be appropriate. The Company utilizes these interest rate swap agreements to convert a portion of its variable-rate debt to a fixed rate (cash flow hedge). The notional amount on which the interest payments are based is not exchanged. The Company had notional amounts of $95,000,000 and $110,000,000 in derivative contracts on its debt at June 30, 2010 and 2009, respectively.

In addition to using derivative instruments as an interest rate risk management tool, the Company also enters into derivative instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with these customer contracts, the Company enters into offsetting derivative contract positions. The Company manages its credit risk, or potential risk of default by its commercial customers, through credit limit approval and monitoring procedures. At June 30, 2010, the Company had notional amounts of $201,327,000 on interest rate contracts with corporate customers and $201,327,000 in offsetting interest rate

 

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contracts with other financial institutions to mitigate the Company’s rate exposure on its corporate customers’ contracts. At June 30, 2009, the Company had notional amounts of $139,197,000 on both interest rate contracts with corporate customers and offsetting contracts with other financial institutions.

Because the swap agreements used to manage interest rate risk have been designated as hedging exposure to variable cash flows of a forecasted transaction, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings or when the hedge is terminated. The ineffective portion of the gain or loss is reported in earnings immediately.

In applying hedge accounting for derivatives, the Company establishes a method for assessing the effectiveness of the hedging derivative and a measurement approach for determining the ineffective aspect of the hedge upon the inception of the hedge. These methods are consistent with the Company’s approach to managing risk.

For interest rate swap agreements that are not designated as hedging instruments, changes in the fair value of the derivatives are recognized in earnings immediately. Except for commercial customer contracts, there are no interest rate swap agreements that currently are not designated as a hedging instrument at June 30, 2010.

Rate Lock Commitments

The Company enters into commitments to originate loans whereby the interest rate on the prospective loan is determined prior to funding (“rate lock commitments”). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value as derivative assets or liabilities, with changes in fair value recorded in net gain or loss on sale of mortgage loans. The fair value of rate lock commitments was immaterial during the first six months of 2010 and 2009.

Equity-indexed Certificates of Deposit

Beginning in the second quarter of 2010, IBERIABANK offers its customers a certificate of deposit that provides the purchaser a guaranteed return of principal at maturity plus potential equity return, which allows IBERIABANK to identify a known cost of funds. The rate of return is based on the performance of ten large cap U.S. stocks in the S&P 500 stock index, representing a variety of industry segments. Because it is based on an equity index, the rate of return represents an embedded derivative that is not clearly and closely related to the host instrument. ASC Topic 815 therefore requires the certificate of deposit be separated into two components: a zero coupon certificate of deposit (the host instrument) and a written option purchased by the depositor (an embedded derivative). The discount on the zero coupon deposit is amortized over the life of the deposit, and the written option is carried at fair value on the Company’s consolidated balance sheet, with changes in fair value recorded through earnings. IBERIABANK offsets the risks of the written option by purchasing an option with terms that mirror the written option that is also carried at fair value on the Company’s consolidated balance sheet. At June 30, 2010, the Company had equity-indexed certificates of deposit of $11,399,000 with offsetting written options having a notional amount of $11,399,000. There were no equity-indexed certificates of deposit at June 30, 2009.

 

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At June 30, 2010 and 2009, the information pertaining to outstanding derivative instruments is as follows:

 

(dollars in thousands)    Balance Sheet
Location
   Asset Derivatives    Balance Sheet
Location
   Liability Derivatives
        2010    2009       2010    2009
        Fair Value       Fair Value

Derivatives designated as hedging instruments under ASC Topic 815

                 

Interest rate contracts

   Other assets    $ 10,337    $ 16,792    Other

liabilities

   $ 157    $ 859
                                 

Total derivatives designated as hedging instruments under ASC Topic 815

      $ 10,337    $ 16,792       $ 157    $ 859
                                 

Derivatives not designated as hedging instruments under ASC Topic 815

                 

Interest rate contracts

   Other assets    $ 19,778    $ 13,601    Other

liabilities

   $ 19,778    $ 13,684

Written and purchased options

   Other assets      825      —      Other

liabilities

     825      —  
                                 

Total derivatives not designated as hedging instruments under ASC Topic 815

      $ 20,603    $ 13,601       $ 20,603    $ 13,684
                                 

At June 30, 2010, the Company was not required to post collateral for any derivative transactions. The Company does not anticipate additional assets will be required to be posted as collateral, nor does it believe additional assets would be required to settle its derivative instruments immediately if contingent features were triggered at June 30, 2010. As permitted by generally-accepted accounting principles, the Company does not offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against recognized fair value amounts of derivatives executed with the same counterparty under a master netting agreement.

 

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At June 30, 2010 and 2009, the information pertaining to the effect of the derivative instruments on the consolidated financial statements is as follows:

 

(dollars in thousands)

 

  Amount of
Gain (Loss)
Recognized

in OCI
(Effective Portion)
 

Location of

Gain (Loss)
Reclassified from
Accumulated

OCI into Income
(Effective Portion)

  Amount of
Gain (Loss)
Reclassified from
Accumulated
OCI into Income
(Effective Portion)
 

Location of

Gain (Loss)
Recognized in
Income on
Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)

  Amount of
Gain (Loss)
Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)
Derivatives in ASC Topic 815 Cash Flow Hedging
Relationships
  2010   2009       2010   2009       2010   2009

Interest rate contracts

  $ 6,617   $ 10,356   Interest income (expense)   $ —     $ —     Other income (expense)   $ —     $ —  
                                       

Total

  $ 6,617   $ 10,356     $ —     $ —       $ —     $ —  
                                       

 

(dollars in thousands)    Amount of Gain
(Loss)  Recognized in
Income on
Derivative
  

Location of Gain

(Loss) Recognized
in Income on
Derivative

Derivatives Not Designated as Hedging Instruments under ASC Topic 815    2010    2009     

Interest rate contracts

   $ —      $ 120    Other income (expense)
                

Total

   $ —      $ 120   
                

During the six months ended June 30, 2010, the Company has not reclassified into earnings any gain or loss as a result of the discontinuance of cash flow hedges because it was probable the original forecasted transaction would not occur by the end of the originally specified term.

At June 30, 2010, the fair value of derivatives that will mature within the next twelve months is $206,000. The Company does not expect to reclassify any amount from accumulated other comprehensive income into interest income over the next twelve months for derivatives that will be settled.

The following is a summary of the balance and changes in the accumulated derivative gain or loss included as a component of other comprehensive income as of and for the six-month periods ended June 30.

 

(dollars in thousands)    2010     2009  

Balance at beginning of year, net

   $ 12,040      $ (675

Unrealized gain (loss) on cash flow hedges

     (8,343     16,971   

Tax effect

     2,920        (5,940
                

Net of tax change

     (5,423     11,031   
                

Balance at end of end of period, net

   $ 6,617      $ 10,356   
                

 

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Note 11 – Fair Value of Financial Instruments

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. ASC Topic 825 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate their fair value.

Investment Securities: Fair value equals quoted market prices in an active market. If quoted market prices are unavailable, fair value is estimated using pricing models or quoted prices of securities with similar characteristics.

Loans: The fair value of mortgage loans receivable was estimated based on present values using entry-value rates at June 30, 2010 and December 31, 2009, weighted for varying maturity dates. Other loans receivable were valued based on present values using entry-value interest rates at those dates applicable to each category of loans. Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.

Accrued Interest Receivable and Accrued Interest Payable: The carrying amount of accrued interest approximates fair value because of the short maturity of these financial instruments.

FDIC Loss Share Receivable: The fair value is determined to be projected cash flows from loss sharing agreements based on expected reimbursements for losses at the applicable loss sharing percentages based on the terms of the loss share agreements. Cash flows are discounted to reflect the timing and receipt of the loss sharing reimbursements from the FDIC.

Deposits: The fair value of NOW accounts, money market deposits and savings accounts was the amount payable on demand at the reporting date. Certificates of deposit were valued using a weighted average rate calculated based upon rates at June 30, 2010 and December 31, 2009 for deposits of similar remaining maturities.

Short-term Borrowings: The carrying amounts of short-term borrowings maturing within ninety days approximate their fair values.

Long-term Debt: The fair values of long-term debt are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Derivative Instruments: Fair values for interest rate swap agreements are based upon the amounts required to settle the contracts.

Off-Balance Sheet Items: The Company has outstanding commitments to extend credit and standby letters of credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed. At June 30, 2010 and December 31, 2009, the fair value of guarantees under commercial and standby letters of credit was immaterial.

 

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The estimated fair values and carrying amounts of the Company’s financial instruments are as follows:

 

     June 30, 2010    December 31, 2009
(dollars in thousands)    Carrying
Amount
   Fair
Value
   Carrying
Amount
   Fair
Value

Financial Assets

           

Cash and cash equivalents

   $ 1,124,736    $ 1,124,736    $ 175,397    $ 175,397

Investment securities

     1,747,623      1,751,986      1,580,837      1,581,274

Loans and loans held for sale

     5,875,464      5,813,811      5,851,310      5,851,067

FDIC loss share receivable

     822,858      822,858      1,034,734      1,034,734

Derivative instruments

     30,940      30,940      32,697      32,697

Accrued interest receivable

     33,549      33,549      32,869      32,869

Financial Liabilities

           

Deposits

   $ 8,073,911    $ 8,047,472    $ 7,556,148    $ 7,367,867

Short-term borrowings

     199,969      199,969      263,351      263,351

Long-term debt

     586,130      600,593      745,864      743,361

Derivative instruments

     20,760      20,760      14,175      14,175

Accrued interest payable

     10,603      10,603      11,398      11,398

The fair value estimates presented herein are based upon pertinent information available to management as of June 30, 2010 and December 31, 2009. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Note 12 – Off-Balance Sheet Activities

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The same credit policies are used in these commitments as for on-balance sheet instruments. The Company’s exposure to credit loss in the event of nonperformance by the other parties is represented by the contractual amount of the financial instruments. At June 30, 2010, the fair value of guarantees under commercial and standby letters of credit was $231,000. This amount represents the unamortized fee associated with these guarantees and is included in the consolidated balance sheet of the Company. This fair value will decrease over time as the existing commercial and standby letters of credit approach their expiration dates and the total fair value of letters of credit may increase as new letters of credit are issued.

At June 30, 2010 and December 31, 2009, the Company had the following financial instruments outstanding, whose contract amounts represent credit risk.

 

     Contract Amount
(dollars in thousands)    June 30,
2010
   December 31,
2009

Commitments to grant loans

   $ 160,341    $ 131,145

Unfunded commitments under lines of credit

     1,013,627      1,014,145

Commercial and standby letters of credit

     23,060      30,222

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to be drawn upon, the total commitment amounts generally represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty.

 

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Unfunded commitments under commercial lines-of-credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers.

The Company is subject to certain claims and litigation arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the consolidated financial position or results of operations of the Company.

Note 13 - Segments

The Company’s segments reflect the manner in which financial information is currently evaluated. The Company strategically manages and reports the results of its business through four operating segment levels: IBERIABANK, IBERIABANK fsb, IMC, and LTC.

The Company’s IBERIABANK and IBERIABANK fsb segments offer commercial and retail banking products and services to customers throughout locations in six states. IBERIABANK provides these products and services in Louisiana, Alabama, and Florida, while IBERIABNK fsb provides similar services in Arkansas, Tennessee, and Texas. As a Louisiana-chartered commercial bank and a member of the Federal Reserve System, IBERIABANK is subject to regulation, supervision and examination by the Office of Financial Institutions of the State of Louisiana, IBERIABANK’s chartering authority, and the Board of Governors of the Federal Reserve System (the “FRB”), IBERIABANK’s primary federal regulator. As a federal savings association, IBERIABANK fsb is subject to regulation, supervision and examination by the Office of Thrift Supervision (the “OTS”).

IMC operates mortgage production offices that provide mortgage servicing and mortgage loan origination activities in twelve states. LTC offers a full line of title insurance and closing services throughout Arkansas and Louisiana.

The IBERIABANK and IBERIABANK fsb segments are considered reportable segments based on quantitative thresholds applied for reportable segments provided by ASC Topic 280, and are disclosed separately. The Company’s IMC and LTC segments do not meet the thresholds provided, but are reported because management believes information about these segments will be useful to readers of these consolidated financial statements. The Other segment includes the results of operations and financial condition of ICP, as well as the activities of the holding company, which include corporate business activities, including payment of employee salary and benefits and marketing, business development, legal, professional, and other corporate expenses. Certain expenses not directly attributable to a specific segment are allocated to segments based on pre-determined means that reflect utilization.

The Company maintains its books and records on a legal entity basis for the preparation of financial statements in conformity with GAAP. The following tables present information prepared from the Company’s internal management information system, which is maintained on a line of business level through allocations from the consolidated financial results.

The following tables present certain information regarding our continuing operations by segment, including a reconciliation of segment results to reported operating results for the periods presented. Reconciling items between segment results and reported results include:

 

 

Elimination of interest income and interest expense representing interest earned by IBERIABANK fsb on an intercompany line of credit with IMC to fund mortgage originations, as well as the elimination of the related line of credit at IBERIABANK fsb included in IBERIABANK fsb total loans

 

 

Elimination of interest income earned by the Company on an intercompany note payable with the Company’s LTC segment

 

 

Elimination of interest income and interest expense representing interest earned by IBERIABANK and IBERIABANK fsb on interest-bearing checking accounts held by related companies, as well as the elimination of the related deposit balances at the IBERIABANK and IBERIABANK fsb segments

 

 

Elimination of investment in subsidiary balances on certain operating segments included in total segment assets

 

 

Elimination of intercompany due to/due from balances on certain operating segments that are included in total segment assets.

 

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There were no discontinued operations for the three and six months ended June 30, 2010 or 2009.

 

(dollars in thousands)   As of and for the Three Months Ended June 30, 2010
    IBERIABANK   IBERIABANK
fsb
    IMC   LTC     Other     Eliminations     Total
Reported

Net interest income (loss)

  $ 59,139   $ 9,985      $ 799   $ (26   $ 242      $ —        $ 70,139

Provision for loan losses

    11,911     978        10     —          —          —          12,899

Noninterest income

    12,195     3,597        10,703     4,811        (602     —          30,704

Noninterest expense

    42,013     12,133        8,602     4,591        8,436        —          75,775

Income tax expense (benefit)

    5,077     (40     1,133     83        (2,924     —          3,329
                                                 

Net income (loss)

  $ 12,333   $ 511      $ 1,757   $ 111      $ (5,872   $ —        $ 8,840

Preferred stock dividends

    —       —          —       —          —          —          —  
                                                 

Income available to common shareholders

  $ 12,333   $ 511      $ 1,757   $ 111      $ (5,872   $ —        $ 8,840

Total assets

  $ 8,635,868   $ 1,658,877      $ 137,388   $ 18,726      $ 1,418,228      $ (1,492,622   $ 10,376,464

Average assets

  $ 8,618,400   $ 1,625,811      $ 104,598   $ 18,722      $ 1,411,021      $ (1,458,038   $ 10,320,514
(dollars in thousands)   As of and for the Three Months Ended June 30, 2009
    IBERIABANK   IBERIABANK
fsb
    IMC   LTC     Other     Eliminations     Total
Reported

Net interest income (loss)

  $ 29,780   $ 8,794      $ 761   $ (40   $ (1,019   $ —        $ 38,276

Provision for loan losses

    2,786     4,997        —       —          —          —          7,783

Noninterest income

    10,066     5,885        10,805     5,232        42        —          32,030

Noninterest expense

    21,641     13,034        7,576     4,485        3,078        —          49,814

Income tax expense (benefit)

    4,674     (939     1,566     275        (1,341     —          4,235
                                                 

Net income (loss)

  $ 10,745   $ (2,413   $ 2,424   $ 432      $ (2,714   $ —        $ 8,474

Preferred stock dividends

    —       —          —       —          —          —          —  
                                                 

Income available to common shareholders

  $ 10,745   $ (2,413   $ 2,424   $ 432      $ (2,714   $ —        $ 8,474

Total assets

  $ 4,193,211   $ 1,437,984      $ 107,620   $ 29,198      $ 773,971      $ (839,357   $ 5,702,627

Average assets

  $ 4,095,867   $ 1,428,267      $ 105,906   $ 28,996      $ 774,212      $ (840,318   $ 5,592,930

 

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(dollars in thousands)   As of and for the Six Months Ended June 30, 2010  
    IBERIABANK   IBERIABANK
fsb
    IMC   LTC     Other     Eliminations     Total
Reported
 

Net interest income (loss)

  $ 118,387   $ 20,037      $ 1,322   $ (59   $ (342   $ —        $ 139,345   

Provision for loan losses

    22,773     3,317        10     —          —          —          26,100   

Noninterest income

    26,488     7,075        18,111     8,523        (889     (251     59,057   

Noninterest expense

    79,417     23,684        15,500     9,014        15,411        (251     142,775   

Income tax expense (benefit)

    12,311     (433     1,539     (202     (5,531     —          7,684   
                                                   

Net income (loss)

  $ 30,374   $ 544      $ 2,384   $ (348   $ (11,111   $ —        $ 21,843   

Preferred stock dividends

    —       —          —       —          —          —          —     
                                                   

Income available to common shareholders

  $ 30,374   $ 544      $ 2,384   $ (348   $ (11,111   $ —        $ 21,843   

Total assets

  $ 8,635,868   $ 1,658,877      $ 137,388   $ 18,726      $ 1,418,228      $ (1,492,622   $ 10,376,464   

Average assets

  $ 8,445,467   $ 1,585,323      $ 88,591   $ 18,745      $ 1,289,476      $ (1,326,166   $ 10,101,435   
(dollars in thousands)   As of and for the Six Months Ended June 30, 2009  
    IBERIABANK   IBERIABANK
fsb
    IMC   LTC     Other     Eliminations     Total
Reported
 

Net interest income (loss)

  $ 57,789   $ 17,523      $ 1,440   $ (100   $ (2,089   $ —        $ 74,563   

Provision for loan losses

    5,033     5,782        —       —          —          —          10,815   

Noninterest income

    17,282     9,361        19,386     9,710        20        —          55,759   

Noninterest expense

    40,651     24,911        13,748     8,952        5,344        —          93,606   

Income tax expense (benefit)

    8,754     (1,067     2,778     257        (2,440     —          8,282   
                                                   

Net income (loss)

  $ 20,633   $ (2,742   $ 4,300   $ 401      $ (4,973   $ —        $ 17,619   

Preferred stock dividends

    —       —          —       —          (3,350     —          (3,350
                                                   

Income available to common shareholders

  $ 20,633   $ (2,742   $ 4,300   $ 401      $ (8,323   $ —        $ 14,269   

Total assets

  $ 4,193,211   $ 1,437,984      $ 107,620   $ 29,198      $ 773,971      $ (839,357   $ 5,702,627   

Average assets

  $ 4,051,667   $ 1,440,072      $ 101,208   $ 28,741      $ 815,907      $ (854,986   $ 5,582,609   

Note 14 – Subsequent Event

On July 23, 2010, the Company announced it had entered into a purchase and assumption agreement with a loss share arrangement with the FDIC to purchase certain assets and to assume certain deposit and other liabilities of Sterling Bank (“Sterling”), a Florida-chartered commercial bank headquartered in Lantana, Florida. Sterling operated six full service offices along the southeast coast of Florida. Based on available information, IBERIABANK acquired total assets of $324 million, including total loans of $228 million, investment securities of $56 million, and OREO of $4 million. IBERIABANK assumed $309 million of total liabilities, including total deposits of $284 million and borrowings of $24 million. In accordance with ASC Topic 805, the Company is currently evaluating the fair values of the acquired assets and assumed liabilities, as well as the fair value of the indemnification asset and intangible assets, including the core deposit intangible asset. Because the Company anticipates the fair values of acquired assets will exceed the fair value of liabilities assumed, the Company anticipates it will record a gain on the acquisition in the Company’s consolidated financial statements for the three and nine months ended September 30, 2010.

 

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Upon completion of the acquisition, IBERIABANK will continue to remain “well capitalized” by regulatory standards, with no additional capital required to support this transaction.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion and analysis is to focus on significant changes in the financial condition and results of operations of the Company during the three- and six-month periods ended June 30, 2010. This discussion and analysis highlights and supplements information contained elsewhere in this Quarterly Report on Form 10-Q, particularly the preceding consolidated financial statements and notes. This discussion and analysis should be read in conjunction with the Company’s 2009 Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

To the extent that statements in this Form 10-Q relate to future plans, objectives, financial results or performance of the Company, these statements are deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which are based on management’s current information, estimates and assumptions and the current economic environment, are generally identified by the use of the words “plan”, “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar expressions. The Company’s actual strategies and results in future periods may differ materially from those currently expected due to various risks and uncertainties. Factors that may cause actual results to differ materially from these forward-looking statements include, but are not limited to, the risk factors described in Part I, Item 1A of the Company’s 2009 Annual Report on Form 10-K. See also Part II, Item 1A of this Form 10-Q.

SECOND QUARTER OVERVIEW

Recent Acquisition Activity

The Company’s results of operations, financial condition, and liquidity for the six months ended June 30, 2010 were significantly impacted by IBERIABANK’s whole-bank purchase and assumptions of assets and liabilities of CapitalSouth Bank, a full-service commercial bank headquartered in Birmingham, Alabama (“CSB”), from the Federal Deposit Insurance Corporation (“FDIC”) on August 21, 2009, as well as the whole-bank purchase and assumptions of assets and liabilities of Orion Bank (“Orion”), a full-service Florida-chartered commercial bank headquartered in Naples, Florida, and Century Bank, FSB (“Century”), a full-service federal thrift headquartered in Sarasota, Florida, from the FDIC, each on November 13, 2009. As a result of the CSB acquisition, IBERIABANK now operates 10 former CSB branches in four Metropolitan Statistical Areas (“MSAs”): Birmingham, Montgomery, and Huntsville, Alabama, and Jacksonville, Florida. IBERIABANK now operates 23 former Orion branches in five Florida MSAs and 11 former Century branches in Sarasota and Bradenton, Florida after the Orion and Century acquisitions.

The three acquisitions were accounted for under the purchase method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic No. 805. Major categories of assets purchased and liabilities assumed, as well as the gain recorded on each transaction (shown as total equity), are presented in the following table. Both the purchased assets and assumed liabilities were recorded at their respective acquisition date fair values. Identifiable intangible assets, including core deposit intangible assets, were recorded at fair value. Because the fair value of assets acquired and intangible assets created as a result of the acquisition exceeds the fair value of liabilities assumed, the provisions of ASC 805 allow the Company to record a gain resulting from each of the acquisitions in its consolidated statements of income in the period of acquisition. During the first quarter of 2010, the Company received notification of additional settlement items from the FDIC and increased the total gain recorded on the transactions by $3.8 million. This gain adjustment is included in noninterest income on the Company’s consolidated statements of income for the six-months ended June 30, 2010.

 

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(dollars in thousands)    CapitalSouth    Orion    Century    Total

Assets

           

Investment securities

   $ 46,027    $ 230,968    $ 22,128    $ 299,123

Loans

     363,117      961,094      417,561      1,741,772

Other real estate owned

     10,244      28,505      21,150      59,899

Core deposit intangible

     377      10,421      2,243      13,041

FDIC loss share receivable

     88,093      711,756      232,053      1,031,902

Other assets

     102,805      422,957      116,874      642,636
                           

Total Assets

   $ 610,663    $ 2,365,701    $ 812,009    $ 3,788,373

Liabilities

           

Interest-bearing deposits

     461,348      1,748,749      504,875      2,714,972

Noninterest-bearing deposits

     56,543      134,337      110,940      301,820

Borrowings

     30,619      344,690      143,006      518,315

Other liabilities

     4,916      15,642      1,586      22,144
                           

Total Liabilities

   $ 553,425    $ 2,243,418    $ 760,407    $ 3,557,251

Total Equity

     57,238      122,283      51,602      231,122
                           

Total Liabilities and Equity

   $ 610,663    $ 2,365,701    $ 812,009    $ 3,788,373
                           

 

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Balance Sheet Position and Results of Operations

During the second quarter of 2010, the Company reported income available to common shareholders of $8.8 million, or $0.33 per common share on a diluted basis, representing a 4.3% increase compared to net income available to common shareholders of $8.5 million earned for the second quarter of 2009. On a per share basis, this represents a 37.3% decrease from the $0.52 per diluted share earned for the second quarter of 2009.

Key components of the Company’s performance are summarized below.

 

 

Total assets at June 30, 2010 were $10.4 billion, an increase of $676.1 million, or 7.0%, from $9.7 billion at December 31, 2009. The increase was a result of an increase in cash and cash equivalents of $949.3 million, mostly from deposit growth and the Company’s common stock issuance in March. Asset growth was offset by a decrease of $258.9 million in fed funds sold.

 

 

Total liabilities at June 30, 2010 were $9.1 billion, an increase of $332.4 million, or 3.8%, from December 31, 2009. The increase in total liabilities stemmed primarily from deposit growth during the year, as the Company had interest-bearing deposit growth of $572.4 million. Growth in deposits was offset by a decrease in the Company’s long-term debt of $159.7 million and a decrease in short-term borrowings of $75.0 million during the six-month period.

 

 

Total shareholders’ equity increased $343.6 million, or 36.0%, from $954.2 million at December 31, 2009 to $1.3 billion at June 30, 2010. Shareholders’ equity was impacted by the issuance and sale of 5.9 million additional shares of the Company’s common stock in March as part of an underwritten public equity offering. Net proceeds to the Company were $329.0 million in additional capital. Additionally, net income of $21.8 million and other comprehensive income of $6.7 million earned during the first six months of 2010 contributed to this increase. The increase was partially offset by $18.2 million in dividends paid on the Company’s common stock during the first six months of 2010.

 

 

Total loans at June 30, 2010 decreased $23.8 million to $5.8 billion at June 30, 2010. The $23.8 million decrease was primarily a result of a decrease in covered loans of $146.2 million, as expected losses were charged off. Organic growth of $122.4 million offset the net decrease in loans covered by loss share agreements. Organic growth was seen primarily in the commercial loan portfolio, as commercial loans increased $131.0 million since December 31, 2009.

 

 

Total customer deposits increased $517.8 million, or 6.9%, from $7.6 billion at December 31, 2009 to $8.1 billion at June 30, 2010. Growth was seen primarily in the Company’s savings and money market products. The increase was primarily a result of deposit growth in the Company’s Alabama and Florida markets.

 

 

Net interest income increased $31.9 million, or 83.2%, for the three months ended June 30, 2010, compared to the same period of 2009. The increase was primarily attributable to growth in the loan portfolio, as well as a decrease in interest expense on the Company’s short- and long-term debt. The Company was able to repay a portion of its borrowings during 2010 using liquidity provided by the Company’s common stock issuance and deposit growth. For the six months ended June 30, 2010, net interest income increased $64.8 million from the same period of 2009. Interest income increased $40.2 million from the second quarter of 2009, primarily attributable to growth in the Company’s loans from the three acquisitions completed in 2009. As a result of acquiring interest-bearing deposits of $2.7 billion during 2009, the Company’s interest expense increased 36.9% from the three months ended June 30, 2009. Deposit rates, as well as a decrease in the Company’s short-term borrowings, tempered the increase in interest expense for the second quarter of 2010. The Company’s net interest margin ratios on a tax-equivalent basis were 3.05% and 3.17% for the three months ended June 30, 2010 and 2009, respectively, and 3.10% for both the six-month periods ended June 30, 2010 and 2009.

 

 

Noninterest income decreased $1.3 million, or 4.1%, for the second quarter of 2010, as compared to the same period of 2009. The decrease in the current period was primarily due to a $5.9 million decrease in gains on the sale of investment securities during the current quarter. These decreases were offset partially by increases in service charges, ATM fees, and broker commissions for the corresponding three-month periods of 2010. For the six-month period ended June 30, 2010, noninterest income increased $3.3 million, or 5.9%, from the same period of 2009. The increase was a result of $3.8 million in gain adjustments due to settlement items recorded in 2010.

 

 

Noninterest expense increased $30.0 million, or 52.1%, for the quarter ended June 30, 2010, as compared to the same quarter last year, and $49.2 million, or 52.5%, for the six-month period. The increases resulted primarily from higher salary and benefit costs of $12.9 million and $24.5 million for the three- and six-month periods, as the Company expanded its employee base with the Alabama and Florida acquisitions. The Company hired additional executives and other personnel to continue staffing the Company’s new markets and expanded operating activities. Noninterest expense also included increases in net costs of OREO property, as the Company

 

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moved an increased number of properties into OREO. FDIC assessments increased in the current year, as IBERIABANK and IBERIABANK fsb are subject to additional FDIC insurance assessments. The increasing size of the Company led to additional occupancy and equipment expenses due to the Company’s acquired branches.

 

 

The Company recorded a provision for loan losses of $12.9 million during the second quarter of 2010, compared to a provision of $7.8 million for the second quarter of 2009. The increase in the provision in 2010 was primarily attributable to loan portfolio growth and a decline in overall asset quality in portions of the Company’s loan portfolio. The provision for the second quarter of 2010 was also impacted by the provision taken on covered loans to reserve for additional expected losses in the covered loan portfolio. As of June 30, 2010, the allowance for loan losses as a percent of total loans was 1.67%, a 71 basis point increase over 0.96% at December 31, 2009. Net charge-offs for the second quarter of 2010 were $6.1 million, or 0.44% of average loans on an annualized basis, compared to $3.1 million, or 0.33%, a year earlier.

 

 

In June 2010, the Company’s Board of Directors declared a quarterly cash dividend of $0.34 per common share, consistent with all four quarterly dividends in 2009 and the first quarter of 2010.

FINANCIAL CONDITION

Earning Assets

Earning assets are composed of interest or dividend-earning assets, including loans, securities, short-term investments and loans held for sale. Interest income associated with earning assets is the Company’s primary source of income. Earning assets averaged $9.4 billion during the quarter ended June 30, 2010, an increase of $1.9 billion, or 26.1%, from the year ended December 31, 2009 and $4.4 billion, or 88.0%, from June 30, 2009.

Loans and Leases – The average loan portfolio increased $545.6 million, or 10.8%, during the first six months of 2010. On a period-end basis, covered loans acquired from CSB, Orion, and Century declined $146.2 million. Organic growth of $122.4 million offset the decreases on the covered assets. As a result, the total loan portfolio decreased $23.8 million, or 0.4%, during 2010.

The Company’s average loan to deposit ratios at June 30, 2010 and December 31, 2009 were 70.6% and 82.1%, respectively. At June 30, 2010, the percentage of fixed rate loans within the total loan portfolio increased to 51% from 48% at year-end. The following table, which includes covered loans, sets forth the composition of the Company’s loan portfolio as of the dates indicated.

 

     June  30,
2010
   December 31,
2009
   Increase/(Decrease)  
(dollars in thousands)          Amount     Percent  

Residential mortgage loans:

          

Residential 1-4 family

   $ 767,502    $ 975,395    $ (207,893   (21.3 )% 

Construction/ Owner occupied

     23,251      32,857      (9,606   (29.2 )% 
                            

Total residential mortgage loans

     790,753      1,008,252      (217,499   (21.6 )% 

Commercial loans:

          

Real estate

     2,484,828      2,500,433      (15,605   (0.6 )% 

Business

     1,348,217      1,217,326      130,891      10.8
                            

Total commercial loans

     3,833,045      3,717,759      115,286      3.1

Consumer loans:

          

Indirect automobile

     268,936      259,339      9,597      3.7

Home equity

     722,272      649,821      72,451      11.1

Other

     145,544      149,194      (3,650   (2.4 )% 
                            

Total consumer loans

     1,136,752      1,058,354      78,398      7.4
                            

Total loans receivable

   $ 5,760,550    $ 5,784,365    $ (23,815   (0.4 )% 
                            

Total commercial loans increased $115.3 million, or 3.1%, compared to December 31, 2009, with the increase primarily attributable to organic growth, partially offset by covered loan decreases. Commercial loans covered by loss share agreements decreased $15.7 million, or 1.6%, during the first six months of 2010, as expected losses on loans were charged off. Offsetting the decrease was legacy commercial loan growth of $131.0 million. Commercial business loans increased $130.9 million, or 10.8%, offsetting commercial real estate decreases from year-end primarily from covered loan paydowns.

 

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The consumer loan portfolio increased $78.4 million, or 7.4%, compared to December 31, 2009, driven primarily by an increase in the home equity and indirect automobile portfolios. The increase in the home equity portfolio from December 31, 2009 is partially the result of the reclassification of a portion of covered loans as home equity loans upon system conversion to conform to the Company’s reporting guidelines. Consumer loan growth in the Company’s non-covered loan portfolio was impacted by the Company’s tightened underwriting standards, a response to a weakened national and regional economy.

A $217.5 million decrease in mortgage loans to $790.8 million also contributed to the decrease during the first six months of 2010. Of the total mortgage loan decrease from December 31, 2009, $194.4 million, or 89.4%, was a result of a decrease in mortgage loans covered by loss share agreements, primarily from the reclassification of home equity loans noted previously. The remaining decrease was attributable to legacy assets, as loans were paid down and new mortgage loan originations slowed. The Company generally retains certain residential mortgage loans to high net worth individuals made through the private banking area. These mortgage loans traditionally have shorter durations and lower servicing costs and provide an opportunity to deepen client relationships. The Company does not originate high loan to value, negative amortization, optional ARM, or other exotic mortgage loans in its portfolio.

Because of the loss protection provided by the FDIC, risk of loss in the CSB, Orion, and Century loan portfolios and foreclosed real estate is significantly different from other assets not covered under loss share agreements. Accordingly, loans subject to loss share agreements are presented as “covered loans” below, and loans not subject to loss share agreements are presented as “non-covered loans.”

The following is a summary of the major categories of non-covered loans outstanding:

 

(dollars in thousands)

 

   June  30,
2010
   December 31,
2009

Non-covered Loans

     

Residential mortgage loans:

     

Residential 1-4 family

   $ 406,762    $ 434,956

Construction/ Owner occupied

     23,251      18,198
             

Total residential mortgage loans

     430,013      453,154

Commercial loans:

     

Real estate

     1,723,108      1,659,844

Business

     1,154,548      1,086,860
             

Total commercial loans

     2,877,656      2,746,704

Consumer loans:

     

Indirect automobile

     268,936      259,339

Home equity

     517,286      512,087

Other

     142,431      142,615
             

Total consumer loans

     928,653      914,041
             

Total non-covered loans receivable

   $ 4,236,322    $ 4,113,899
             

 

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The carrying amount of the covered loans at June 30, 2010 consisted of acquired impaired loans, accounted for in accordance with ASC Topic 310-30, and performing loans at the acquisition date, accounted for by analogy to ASC Topic 310-30, as detailed in the following table.

 

(dollars in thousands)

 

 

Covered Loans:

   Acquired
Impaired

Loans at
Acquisition
Date
   Acquired
Performing
Loans at
Acquisition
Date
   Total
Covered
Loans

Residential mortgage loans:

        

Residential 1-4 family

   $ 68,165    $ 292,575    $ 360,740

Construction/ Owner occupied

     —        —        —  
                    

Total residential mortgage loans

     68,165      292,575      360,740

Commercial loans:

        

Real estate

     29,549      732,172      761,721

Business

     13,639      180,029      193,668
                    

Total commercial loans

     43,188      912,201      955,389

Consumer loans:

        

Indirect automobile

     —        —        —  

Home equity

     17,995      186,991      204,986

Other

     1,391      1,722      3,113
                    

Total consumer loans

     19,386      188,713      208,099
                    

Total loans receivable

   $ 130,739    $ 1,393,489    $ 1,524,228
                    

Asset Quality

The overall credit quality of the Company’s originated assets at June 30, 2010 was considered by management to be strong. Despite declines in asset quality in portions of the Company’s total loan portfolio, management believes asset quality remains favorable when compared to its peers. Declines in asset quality during 2010 were primarily attributable to larger isolated credits and not a significant shift in overall portfolio quality and this impact is described in the “Covered Loans” section below. Consistent with 2009, the Company’s purchase and assumption of CSB, Orion, and Century significantly impacted overall asset quality. Management seeks to recognize and disclose significant problem loans quickly and take prompt action to address material weaknesses in those credits. The Company will continue to closely monitor the risk-adjusted level of return within the loan portfolio.

Written underwriting standards established by the Board of Directors and management govern the lending activities of the Company. The commercial credit department, in conjunction with senior lending personnel, underwrites all commercial business and commercial real estate loans. The Company provides centralized underwriting of all residential mortgage, construction and consumer loans. Established loan origination procedures require appropriate documentation, including financial data and credit reports. For loans secured by real property, the Company generally requires property appraisals, title insurance or a title opinion, hazard insurance and flood insurance, where appropriate.

Loan payment performance is monitored and late charges are assessed on past due accounts. A centralized department administers delinquent loans. Every effort is made to minimize any potential loss, including instituting legal proceedings, as necessary. Commercial loans of the Company are periodically reviewed through a loan review process. All other loans are subject to loan review through a periodic sampling process.

The Company utilizes an asset risk classification system in compliance with guidelines established by the Federal Reserve Board as part of its efforts to monitor commercial asset quality. In connection with examinations of insured institutions, both federal and state examiners also have the authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful” and “loss”. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable, and there is a high probability of loss based on currently existing facts, conditions and values. An asset classified as loss is not considered collectable and is of such little value that continuance as an asset of the Company is not warranted. Commercial loans with adverse classifications are

 

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