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Pacific Continental Corporation (NASDAQ:PCBK)

Q4 2013 Earnings Call

January 23, 2014 2:00 PM ET

Executives

Mick Reynolds – EVP and CFO

Hal Brown – CEO

Roger Busse – President and COO

Casey Hogan – EVP, Chief Credit Officer and Chief Strategy Officer

Analysts

Jacquelynne Chimera – Keefe Bruyette & Woods

Jeffrey Rulis – D.A. Davidson

Don Worthington – Raymond James Financial Inc.

Eric Grulke

David Jacobson

Brett Villaume

Operator

Ladies and gentlemen, I would like to welcome you to today’s Conference Pacific Continental Corporation’s Fourth Quarter 2013 Earnings Call and Webcast. Before we get started, I would like to explain some of the ways that you can participate. This presentation is being recorded and you are currently in listen-only mode. At the conclusion of today’s presentation, management will entertain questions. At that time you may ask a question by (Operator Instructions). We will remind these instructions at the beginning of the question-and-answer session. (Operator Instructions)

Now without any further delay, I would like to introduce our first presenter Mick Reynolds, Executive Vice President and Chief Financial Officer. Mr. Reynolds, you now have the floor.

Mick Reynolds

Thank you very much and welcome to Pacific Continental Corporation’s conference call and webcast to discuss our fourth quarter and fully year 2013 results. Presenting today will be Hal Brown, Chief Executive Officer; Roger Busse, President and Chief Operating Officer; and me.

We will update you on our recent activities and discuss the financial results, reported in our press release distributed after market close January 22, 2014. Our press release is available in the Investor Relations section of our website at www.therightbank.com.

Before we commence the formal remarks, we advise you that this webcast contains forward-looking statements. Statements made are factual as of the time of this webcast. Such forward-looking statements including statements about suggested future profitability, loan growth, problem asset resolution, changes in the net interest margin, and anticipated cost savings, results, and performance of acquisitions of other companies are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Pacific Continental Corporation undertakes no obligation to publicly revise or update the forward-looking statements to reflect events or circumstances that arise after the date of the Company’s fourth quarter and full year 2013 earnings released referenced in this webcast and the date of this webcast.

Participants and listeners should also carefully review any risk factors described in the Company’s periodic reports on Forms 10-K, 10-Q, 8-K, and any other documents filed or furnished from time to time with the Securities and Exchange Commission. This statement is included for the express purpose of invoking the Safe Harbor provisions for forward-looking statements.

Now, let me introduce and turn the call over to Hal Brown, Chief Executive Officer of Pacific Continental Corporation.

Hal Brown

Thank you, Mick. And welcome everyone as we present our 2013 fourth quarter and full year results. I will characterize the year as one of success and a continuation of improving trends. Loan growth, increasing revenue, margin expansion, the successful Century Bank acquisition and an improving economy led to record earnings and supports are increasingly optimistic outlook. These results did not go unnoticed by investors with the company share price increasing 64% and a total return of 74% and including cash dividends.

The fourth quarter was pretty much in line what we expressed in our third quarter conference call and therefore our prepared comments will again be fairly brief. Although we did have a bit of noise in our income statements with some prepayment penalties affecting our net interest margin and we took evaluation right down on our other real estate holdings. Also in recognition of emerging complexities in Merchant Bank Card processing during the fourth quarter we elected to outsource this activity, Mick will explain how this change will affect our income statement going forward.

As I said, we are increasingly optimistic. It is certainly fun to again be focused on revenue enhancement rather than well in resolution. There remain challenges as we continue to face intense competition for quality loan and we are having to be very disciplined in our underwriting and rate discussion for conditions certainly have improved from that of a few years ago. Mick and Roger will provide a bit more color on the quarter and when possible will provide near term outlook. I will then complete our prepared remarks with some comments on our 2014’s strategic initiatives and our capital management strategy. So with that as an introduction, I’ll ask Mick to continue with the presentation.

Mick Reynolds

Thank you, Hal. In my portion of the presentation I’ll be addressing our net interest margin, provide some brief commentary on our securities portfolio, and provide more information on noninterest income and expense, plus also I have some brief comments on our effective tax rate and our tax provision in the fourth quarter and moving forward.

As appropriate and at best possible I will provide listeners and analysts with some expectation for first quarter 2014. Our first quarter net interest margin 4.39% was down from the prior quarter due to the non-recurring item we had during the third quarter. The fourth quarter net interest margin also included the non-recurring item at $220,000 prepayment penalty on an early loan payoff. Examining our core margin which will eliminate the non-recurring items and the accretion of the acquired loan, we continue to see improvement.

Our core net interest margin for the fourth quarter was 4.28% an improvement of five basis points on the third quarter core margin of 4.23% and 19 basis point improvement over the 4.09% core margin reported for second quarter. The improvement in the core margin was due to the continued loan growth which shifts more of earnings assets into higher yield loan rather than securities portfolio. In addition, the margin benefited from improved yields and the securities portfolio as prepayment fees on mortgage backed securities slowed due to higher long-term rate.

We saw no changes in our overall cost to fund during the fourth quarter when compared to the prior quarter. Looking to the first quarter 2014, the steeping yield curve may provide some better pricing opportunities on the loan side but the competition for qualitative loans remained very intense so far due production is still not accretive to our current portfolio loan yields. However, our anticipation of continued loan growth and subsequent improvement in our mix of earnings assets when combined with the accretion of the loan marks may mitigate portion of any decline in loan yield.

We expect our securities portfolio to provide yield stable with fourth quarter 2013 level. We continue to see limited opportunities to lower across the core deposits and will continue to look for opportunities to extend our wholesale funding maturity structure which would increase the cost of our interest bearing liabilities that does decrease our exposure to liking rate.

Given these many variables and the volatile market interest rate environment, our suggested outlook for the first quarter core margin is stable with our fourth quarter core interest margins.

Now turning to our securities portfolio. At December 31, 2012, the portfolio had a pretax unrealized loss of $242,000 compared with an unrealized gain of $585,000 at September 30, 2013. The decline in market value of the portfolio was due to small increase in long-term rates during the quarter, however we do see some spreads item particular in our business for securities which mitigated some of the market value decline due to higher rate. The average life and duration at the portfolio at the yearend was 4.2 and 3.0 years respectively, down from the prior quarter and virtually unchanged from December 31, 2012. We anticipate the portfolio balance will decline modestly during the first quarter 2014.

With regard to noninterest income and noninterest expense for the fourth quarter as we had indicated noninterest income increased over the prior quarter, all noninterest expense was lower from that of the prior quarter. Going forward into 2014, we will have some changes in the component of both noninterest income and noninterest expense. During the fourth quarter 2013, we outsourced our Merchant Bank Card processing portfolio. Previously we had both net interchange revenue and noninterest income and Merchant processing expenses in the noninterest expense category. Commencing in the first quarter 2014 to our outsourcing agreement we will only be bucking net revenue which will be recorded in the noninterest income category only. Thus with this change we will see a decline in both our noninterest income and noninterest expense levels. But we expect no change in our pretax income and we do have some upside potential for additional revenue of certain production goals on that.

Taking this into consideration, we would anticipate our noninterest income in the first quarter 2014 will range from $1.1 million to $1.2 million while our noninterest expense will range from $9.7 million to $9.9 million. As I have indicated in the past presentation certain categories of noninterest expense such as other real estate and legal fees can create significant volatility in quarter expense levels and cause our actual results to vary from indication.

Last let me make some comments on our effective tax rate. In the fourth quarter, our effective tax rate moved up to 38.2%, this was the result of a special session by the Oregon Legislature in October, 2013, at which time the increase the corporate tax rate from 6.6% to 7.6% on any income over $ 1 million. This previously we have paid the higher 7.6% on any income over $10 million. As a result of that our effective rate didn’t jump in the fourth quarter as it was retroactive back to the first of the year. As we go forward in the 2014 considering this new tax increase again will as retroactive back to January 1, 2013, we expect our effective tax rate to be approximately 34.5% as we move through 2014.

And that concludes my remarks and now I’ll turn it over to Roger.

Roger Busse

Thank you, Mick. Today, I will discuss various factors related to the bank’s loan and deposit growth during 2013. I will also describe the quality of that expansion particularly in our niche segments and the outlook for continued balance sheet growth in coming quarter. I’ll also briefly comment on a loan portfolio migration, loan loss reserves and expected provisioning going forward.

As anticipated in a last webcast loan growth continued at a steady pace. Loan production during the fourth quarter was $113.1 million, which included 178 new loans totally $71.9 million with remainder which being renewed. Net loans added for the fourth quarter were $16.1 million; annualized year-to-date loan growth excluding acquired loans was 9.24%. This is the eight consecutive quarter of loan growth which underscore the success of the bank’s niche lending strategy, positive lender marketing efforts and increasing referrals from long time, non-fee based sources, all within a gradually improving regional and national economy.

The bank achieved this growth while still maintaining its long standing practice of cash flow lending supported by recourse guarantees with appropriate amortization and collateral advanced parameters. Quality, profitability and then growth remained the hallmarks of our lending strategy.

Looking at specific segment and including acquired loans, loans grew by $123.5 million during the year; we see a broadening diversity of growth in various segments. This include on owner occupied commercial real estate up $30 million, investor commercial real estate up $13.5 million, multifamily construction up $6.4 million and commercial and industrial lending up $64.7 million. Current loan production pipeline remained strong suggesting a likely consideration for organic loan growth during the first quarter of 2014. Loans in the Seattle market contracted for the year falling $21.7 million to $132 million as of December 31.

Aggressive pricing competition primarily in the dental and medical segments and relaxation of credit standards by some competitors landed this contraction. The recent addition of a seasoned senior lender in Seattle region combined with a growing loan pipeline as borrowers now seek expansion and new opportunities suggest that loan run off in that market will stand with positive growth anticipated for the year.

With regard to our healthcare segment, growth in dental lending during 2013 was up 13.47% year-over-year. As of December 31, the portfolio reached $307.3 million representing 30.9% of the total portfolio. Year-to-date new loan production showed a higher concentration in national versus local or in market loans. The net growth in national loans was $49.7 million whether was contraction local loans of $13.2 million. The net contraction local loans largely resulted from the combination of exuberant reprising and extended amortization offered by some competitors many beyond industry norms which we would not entertain. Overall dental growth continues to be centered in term acquisition financing, the majority of which is general and pediatric industry which is the strongest performing segment.

National market loans now represent 41.9% of the dental portfolio, the overall quality of the portfolio remained sound but annualized due to date losses of 0.38% and 30 to 89 day delinquencies are 0%. The portfolio continues to be well controlled and governed by a strong emphasis on cap practice cash flows prudent underwriting with recourse guarantees, dedicated administrative oversight and appropriate enterprise values. As you may recall, our national lending is restricting to owner occupied real estate and seasoned practiced refinance and acquisition loans. Expansion into the national market which require state prequalification and a proved referral sources that receive no broker fees has been successful now in 29 states.

The healthcare portfolio other than dental also enjoyed quality growth. As of December 31, 2013, this segment grew 57.6% to $61.8 million, a large portion of this expansion 50.7% was in veterinary lending; a high quality segment that only reported two delinquencies greater 30 days during 2013. The bank is carefully evaluating strategies for additional growth in veterinarian and other similar medical related segments during 2014. With regard to deposit growth, period in core deposit grew by $51.7 million or 5.25% to $990.3 million as of December 31, 2013.

Core deposits are defined as any nonpublic in market deposit regardless of size. Noninterest bearing demand deposit was $366.9 million or 37% of core deposit. It is clear that we return to more normal pre-recession pattern, a seasonal deposit declines during the first half of the year and then growth in the second half of the year. Currently activity suggests the typical pattern of deposit contraction during the first half of the year is likely.

Finally, it is worth noting the retention of acquired deposits has been very good. And through December 31, we have remained approximately 84% of the [sitry] bank deposits.

Now turning to credit statistic and migration. We are pleased to note that virtually all credit measurement were directionally positive for the quarter end year. I would specifically point out the continued reduction in nonperforming loans and nonperforming assets which is declined to 0.46% and 1.45% respectively as of December 31, 2013. Both numbers are down significantly from the 0.97% and 1.92% from a just a year ago. We also note that our past two loans in the 30 to 89 days category have now been at or below 1% for 18 consecutive quarters and total past dues including nonperforming loans ended a period and the year had a very respectful 0.76%.

Net loan losses for the year only 0.07% of total loans or $678,000. Given the level of existing reserves, we did not make a provision to loan loss reserve in the fourth quarter. And given our current analysis of loan migration and growth potential we would not expect to add additional provision during the first quarter of 2014.

Finally, net OREO expense of $639,000 for the quarter included normal annual expenses related to taxes or OREO expense as well as other adjustment to book values based on updated evaluation and appraisals. As we have indicated in the past all OREO properties are all actively listed for sale and in some instances we have expected purchase and sale agreement which are in place. It is difficult to predict exactly when sales will be completed as so much is rely on activities outside of our control.

This concludes my prepared remarks. Hal will now complete the presentation.

Hal Brown

Thank you, gentlemen. We begin 2014 with a strong balance sheet and excellent prospects, credit statistics are good, reserves are strong and we have plenty of liquidity and capital. We have well understood business model and we operate in a best known place market importantly we also have the people and capacity to put these attributes to work. Our strategic initiatives for 2014 are focused on capital leverage, revenue growth and client experiences. We already do a great job servicing our clients and we have received many, many compliments. Within this very competitive environment, we recognize the need to become more sales and education focused. Our clients look to us for much more than just financial products, and we are meeting those needs with specific outreach and educational opportunities. The goal is not just to have more clients but to have more client advocates. As rates came down falling margins eroded top line revenue. As Mick suggested the net interest margin appears now to be stable and even some small upwards changes in the margin can have a material impact on interest revenue. In 2014, we expect to introduce wealth management and interns products that match our unique client demographic for additional noninterest income. These services will be provided to strategic partnerships with little to no upfront cost while allowing us to retain ownership of the client relationship. We cannot expect these products to add materially to 2014 revenue but over time we see both revenue enhancement and deeper client commitment.

Capital management remains the key objective. Further leverage of our capital position will enhance return on equity and improve shareholder metrics. We continue to have conversations with prospective partners as a well-structured acquisition is perhaps the most expedient way to employ capital. Our target remain some $300 million banks with good liability structure in our existing market from Seattle, Portland and Eugene, and when we look at branch acquisitions to expand market share. However, we will remain disciplined as we consider these opportunities.

Since the first quarter of 2012, we have effectively paid out 100% of our previous quarter’s earnings to the share repurchase regular and special cash dividends. This has kept shareholder equity at December 31, 2011, level of approximately $175 million, while at the same time growing the balance sheet. This practice hasn’t enhanced shareholder leverage while providing a very nice quarterly dividend. Following these successful transaction other capital deployment opportunity, the Board of Directors will continue to consider this special quarterly cash dividends.

Finally, I wish to express my thanks to our Board for their guidance and discipline, our employees for their hard work and commitment and to our shareholders for their patience and continued investment.

This concludes our prepared remarks and we will now entertain your questions. In addition to Roger and Mick, Casey Hogan, Chief Credit and Strategy Officer is also available to answer your questions. Nicol, please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And Jacque Chimera with Keefe Bruyette & Woods have a question.

Jacquelynne Chimera – Keefe Bruyette & Woods

Hi, good morning everyone. I wondered if you might take a little bit deeper into pipeline and where you see generation coming – in the coming year and how big do you think the growth that you are having that veterinary lending could continue and your expectation for dental lending that kind of thing.

Roger Busse

Jacque, this is Roger and in case you can feel as you see it is fit our veterinary lending has been expanding very well this last year. The pipeline is very robust in veterinary lending and we continue to see good growth potential and a very high performing segment. So the pipeline itself will be very– this segment is strong.

Casey Hogan

I’ll just add, Jacque, this is Casey, I will just add to Roger’s comments as he indicated in his prepared remarks, we are really seeing growth in virtually all segments, our lenders are active both in market as well as the national scene as Roger has mentioned and things feel like there are in middle and long right direction so we expect to see across the board.

Jacquelynne Chimera – Keefe Bruyette & Woods

Okay and did I hear that correctly that veterinary lends were up 50% year-over-year?

Roger Busse

The increase that took place overall in the portfolio healthcare other than dental, 50% of that was veterinary but I would say the veterinary portfolio has grown substantially over the previous year itself probably as high as 80%.

Jacquelynne Chimera – Keefe Bruyette & Woods

Okay and that in all market.

Roger Busse

Yes.

Jacquelynne Chimera – Keefe Bruyette & Woods

And what is about Seattle versus Portland I guess that makes it so much more competitive for end market in dental lending?

Roger Busse

Our experience in Seattle had to do with some very specific competitors that we are trying to continue to take inroads up there in the dental industry. There was a very deliberate program of trying to obtaining existing world performing cash flow practices. And so they are simply an under cutting of pricing and extension of amortization Jacque beyond industry norms to obtain these and we couldn’t play in that arena. We don’t see that in every one of our markets but it was particularly prevalent in Seattle and we have seen some of them in Portland as well.

Jacquelynne Chimera – Keefe Bruyette & Woods

Okay, and is it just one particular competitors that they are just doing that or is it just a couple of different individual are doing that?

Roger Busse

There was one in particular but we are seeing – there are probably a couple of others as well they are trying to play in that same area but primarily one.

Jacquelynne Chimera – Keefe Bruyette & Woods

Okay, great, thank you. I’ll hope back now.

Operator

Jeffrey Rulis with D.A. Davidson has a question.

Jeffrey Rulis – D.A. Davidson

Thanks, good morning. May be a question for either Mick or Casey on – I think Mick you mentioned OREO cost kind of tough to get handle around but in light of some larger I guess cost to last couple of quarters on OREO any colors to what I mean that can be volatile by nature but in terms of what you see going forward, you expect that line item to be considerable in coming quarters?

Casey Hogan

Yeah, Jeff, Casey. Fourth quarter obviously has the excess and some of those additional costs, so those would show off there too by virtue of giving either some of these properties and some of those – I think Roger mentioned are under contract, we hope those get probably through we should see less volatility in that area as well. And I think again just with most stabilized market across segment of virtual real estate I think we will turn benefit too so I am not projecting too far ahead but I would expect to see lower cost in 2014 than we did 2013.

Mick Reynolds

Jeff, I would just add that the two, three properties in our OREO account for probably about 85% of our total and as indicated we are starting to see some movement on those and certainly when those are disposed off, it should decrease that volatility that we’ve been seeing.

Jeffrey Rulis – D.A. Davidson

Right. Was there reference on the three properties and Casey update and if –?

Mick Reynolds

We have talked about that in our 10-Q and again our in previous 10-K that there are three large properties, one of which we talked about couple of years ago which is large commercial assembly.

Jeffrey Rulis – D.A. Davidson

Right but okay I didn’t know if there was new update on those but okay, and then may be question for Hal on the – you mentioned that the wealth management insurance products to be introduced, is that still pretty early or is there a cost commitment that might be upfront or how is that rollout anticipated?

Hal Brown

We would expect to begin offering those products in late first quarter perhaps early second quarter. We do not expect any upfront cost that is material at all. These are partnership to where costs are obtained by the third party while we retain the – [Technical Difficulty] over a year, we are very, very positive to dental in contact and getting that launch.

Jeffrey Rulis – D.A. Davidson

Okay, thank you.

Operator

We have a question from Don Worthington with Raymond James Financial Inc.

Don Worthington – Raymond James Financial Inc.

Good morning. In terms of the charge offs in the quarter, any more color in terms of the composition I think it was 885,000 you said one loan, more than one and may be type of property.

Roger Busse

We are having technical difficulties, we are unable to hear you expect for every other word unfortunately Casey. So I will take it up. So with regard to the charge off is primarily one loan is not – there is nothing systematic there Don.

Don Worthington – Raymond James Financial Inc.

Okay. And then in the other noninterest income line, there was up little bit year-over-year, what’s in there, was that where the Merchant Card impact was or is there something else in that number?

Roger Busse

We are not able to hear you Mick, I am sorry. I would say there is a little bit involve there with regard to the Merchant Bank Card portfolio probably $120,000- $150,000 but for the most part it’s just miscellaneous items. Mick has described pretty much in his comments today.

Don Worthington – Raymond James Financial Inc.

Okay, thanks, Roger. Appreciate it.

Operator

And we have a question from Eric Grulke.

Eric Grulke

Yeah, hi, good morning or I guess most good afternoon. I wanted to ask you a question of – you talked about losing some loans in the Seattle market due to competitor pressure it’s just sort of the general word to describe our expression to describe it, on the deposit side it looks like your deposit were still up, do you expect any erosion from the Seattle market core deposits that will follow or not?

Roger Busse

No, we don’t anticipate any deterioration. And here is why Eric. In the market place up there primarily our emphasis is on the nonprofit arena and we have over 1100 relationships now and those continue to grow, so with regard to the core deposit base I would see that they are going to continue to show that the averages will grow. So core deposit averages will be up.

Eric Grulke

Okay, but I think someone mentioned earlier in the call that just from a seasonality standpoint there might be a little bit of erosion in the first half.

Roger Busse

Oh, yeah, I am sorry. What happens Eric, every year or generally speaking it is primarily not in the Seattle market. It is primarily down in our UG market. We have a lot of post a distributed funds also we are preparing to pay taxes, they are entering at the new projects etcetera and so it’s healthy sign. It’s difficult seasonal pattern and decline in deposit that we build in the second half of the year. But with regards to Seattle it should remain fairly constant.

Eric Grulke

Okay, no my question was nothing is changed in the guidance and what we have seen in past years on the deposit side then.

Roger Busse

That’s correct

Eric Grulke

Okay and just one last if I may. Roger, I think there is something you mentioned it a just sort of trigger something as I was thinking, you made the comment about the national lending in the dental business that I think it was limited to just owner occupied real estate and practice acquisition loans.

Roger Busse

Yes.

Eric Grulke

So just refresh my memory what in a local market are you doing beside that you are not doing in a national market. I thought it was most of it to begin with.

Roger Busse

It is in the majority of it that is very true. We also do a lines of credit, we will do other types of lending or we do some startup in this area, we don’t do in outside, there is a very, very few startup so they take place. But primarily there is only a few other options, working capital being one of them and equipment as I mentioned and some occasionally startup using SBA financing primarily.

Eric Grulke

Okay, that’s fine. Thanks very much for the answers.

Operator

We have a question from David Jacobson.

David Jacobson

Hello.

Roger Busse

Hi, David.

David Jacobson

Hope everybody is well. I have two questions may be each for Roger I don’t know. The first is am I correct the core deposit declined in the fourth quarter from the third quarter?

Roger Busse

No. They have continued to grow and there is a good steady increase in the second half of the year. You may be – if you are looking at the averages I don’t know if that’s where they right now.

David Jacobson

No, I was comparing fourth quarter report to third quarter report where I got that.

Roger Busse

I can see this grow in average quarter five David rose.

David Jacobson

Okay because that would be consistent what you have been saying all along at second half core deposit growth.

Roger Busse

Yes, sir.

David Jacobson

Second thing and it’s really a minor thing but I have been curious over the several calls and you mentioned it that you cannot pay referral fees on your national loans for dental loans or dental business. Why does anybody refer without the reason for people referring? If they don’t get anything.

Roger Busse

Well, they do get something. Sometimes the fee is paid separately and directly by the dentist usually that’s the case, sometimes the fee is financed by them as a part of the deal but they pay it because –

David Jacobson

Okay, so you don’t pay it, they do.

Roger Busse

Yeah, we don’t pay. We don’t want and send people to send us deals for that reason. There is too –

David Jacobson

That makes sense. I just didn’t understand it without that qualification.

Operator

We have a question from Brett Villaume.

Brett Villaume

Good morning, gentlemen. Hi, I just a sort of follow up on the dental loan competition that you mentioned in Seattle. Do you anticipate that is more just a near term market condition or could we also see that sort of expanded in 2014 or even get worse?

Roger Busse

I don’t – we don’t have (inaudible) course to their strategy, we refer to anecdotally and this going to continue for some time but I don’t think it’s going to accelerate. I think the strategy is just to continue to good high quality loans but frankly there is finite level in those available and we have – we have still good loyal client so I – we are just going to – we are going to continue be the competition, what we won’t do is stretch our long-term amortization and of course we won’t stretch on that, we won’t drop rates to ridiculously low level. Be it is the cash flow stacking issue for the dentist professionals, they are starting to catch on with that because they turned their life on those loans, they are stretching 20 years it is going to extend pass their need and as a result of that two or three loans during that interim and have our cash flow stacking issue and interest rate which we look well today will be much higher so I think a lot of the practice managers and advisors are beginning to help us educate those clients.

Brett Villaume

On the sort of drop and decrease in investment securities as percent bearing assets, you guys have opinion as to whether or not that more market driven or is that goal you would expect goal from where you want that percentage to eventually end up?

Roger Busse

I am going to give you just my take on that since Mick can’t speak to this and I know we had like to, he clearly the vital– we have established marketable securities portfolio to throw our cash flow to help fund loan growth for one thing but as far as the as the percentage we could go as low as 15% and run it down and our preference would be to employ those marketable securities in a higher yielding asset and loan so we have plenty of cushion there but our plan is to continue to roll those into higher rate assets and you can see we are making progress.

Brett Villaume

Fair enough and my final question would just about – you gave the guidance that we should not anticipate or provision expense in the first quarter. Do you have a goal for where you want reserve levels to eventually end up? Do you anticipate that you obviously a continuation of as brand [that as being recent]?

Roger Busse

We don’t have a goal. What we do is we watch the migration and the portfolio and our plan as we stated before is a great question is to continue to grow the portfolio that will gradually as a percentage of the outstanding reduce the allowance as a percentage. We have seen very interesting levels of provisioning across the board. We see like we are appropriately and well provisioned but there is a room for continued growth in the portfolio and we could see that loan provision continue to contract us a percentage without us being uncomfortable.

Operator

There is no other question in queue at this time.

Roger Busse

Okay, well thank you very much. We appreciate your participation today. And with that we are concluded. Have a good day.

Operator

Thank you, ladies and gentlemen. This concludes the Continental Corporation Fourth Quarter 2013 Earnings Call and Webcast. Thank you very much for joining us and thank you to our presenter. You may now disconnect.

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