National Bank Holdings' (NBHC) CEO Tim Laney on Q2 2014 Results - Earnings Call Transcript

Jul.26.14 | About: NBH Holdings (NBHC)

National Bank Holdings Corporation (NYSE:NBHC)

Q2 2014 Earnings Conference Call

July 25, 2014 11:00 ET

Executives

Tim Laney - President and Chief Executive Officer

Brian Lilly - Chief Financial Officer

Rick Newfield - Chief Risk Management Officer

Analysts

Paul Miller - FBR Capital Markets

Mike Pareto - KBW

Tim O’Brien - Sandler O’Neill

Matt Olney - Stephens Inc

Operator

Good morning, everyone and welcome to the National Bank Holdings Corporation 2014 Second Quarter Earnings Call. My name is Steve and I will be your conference operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session following the presentation. As a reminder, this conference is being recorded for replay purposes.

I would like to remind you that this conference call will contain forward-looking statements, including statements regarding the company’s loans and loan growth, deposits, strategic capital, potential income streams, gross margin, taxes, and non-interest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties, and other factors which are disclosed in more detail in the company’s most recent filings with the U.S. Securities and Exchange Commission. These statements speak only as of the date of this call and National Bank Holdings Corporation undertakes no obligation to update or revise these statements.

It’s now my pleasure to turn the call over and introduce National Bank Holdings Corp’s President and CEO, Mr. Tim Laney.

Tim Laney - President and Chief Executive Officer

Thank you, Steve. Good morning and thank you for joining National Bank Holdings 2014 second quarter earnings call. I have with me our Chief Financial Officer, Brian Lilly; and Rick Newfield, our Chief Risk Management Officer. On this call, we’ll share our observations on the second quarter. We will share some thoughts on our outlook as we did during last quarter’s call and we will again take a deeper dive into the credit quality of both our originated loan portfolio as well as review the strong performance of the acquired non-strategic portfolio.

During the quarter, my teammates across the company work to deliver another record level of loan production. We surpassed our goal of $250 million in quarterly originations, with $260 million of production during the second quarter representing a 58.1% increase in year-over-year loan originations. Equally important, the team accomplished these results, while maintaining an intense focus on credit quality. As Rick will share with you in detail, the originated loan polio continues to perform extremely well.

A focus on building and expanding relationships with our clients led to a 14.9% annualized growth in demand deposits and banking fee income increased 8.3% from the prior quarter. Direct operating expenses were essentially flat during the period, but we believe we are well-positioned to realize reductions in our operating expense run rate over the next several quarters. With respect to our acquired loan pools during the quarter, we realized $12.2 million in accretable yield pickup contributing to a life-to-date net pickup of $160 million. As a reminder, this pickup in cash flow is realized over the life of the loan pools.

And on that note, I will turn the call over to Rick Newfield and he will update you in more detail on both our acquired and originated loan portfolios. Rick?

Rick Newfield - Chief Risk Management Officer

Thank you, Tim and good morning. I will first cover our originated portfolio with respect to our second quarter fundings and then share some facts regarding the loan portfolio’s excellent credit quality. I will also discuss our continued success in reducing non-strategic loans at a rapid pace, while delivering outcomes better than our original marks.

Our originated loan portfolio totaled $1.5 billion at June 30, 2014, an increase of 60% over March 31, 2014, which is an annualized growth rate of 64%. We have delivered these impressive results while remaining disciplined in our underwriting and credit structuring. Furthermore, we continued to build our loan portfolio with a granular mix of consumer and commercial loan types. Combined commercial and industrial, agriculture, and owner-occupied commercial real estate make up 57% of our originated portfolio. Consumer mortgage and home equity loans make up 30%, non-owner-occupied commercial real estate 12%, and other consumer loans the remaining 1%.

As Tim said our second quarter fundings of $267 million represents a new high for NBH and are 58% higher than second quarter 2013. Commercial originations of $219 million were granular maintaining trends from prior periods with average fundings of $1.1 million. 79% of these commercial originations were in commercial and industrial owner occupied real estate and agriculture. The remaining commercial loan originations were composed of conservatively underwritten, non-owner occupied commercial real estate in our local markets. In addition to our disciplined approach to underwriting each loan, we have in place industry sector and credit type limits to ensure that our loan portfolio remains diversified. For example, no individual industry sector can have a greater concentration than 15% of our total loan commitments and less favored industry sectors such as construction, land and acquisition development will be 5% or less.

Consumer loan originations of $48 million were primarily composed of high quality consumer residential mortgage loans and increased 54% relative to first quarter. While the mix of purchase and refinance purpose continues to be balanced, our second quarter residential originations had an average loan to value of 64%. We continued to underwrite to our smart and prudent standards with average FICO scores of 7.65. And the average funding for residential loan was $110,000 during the quarter.

Turning to credit quality, I am very pleased with the performance of our total non-310-30 loans which totaled $1.7 billion at June 30, 2014. Net charge-offs were just $24,000 or one basis point annualized. 90 day past dues remained immaterial. Non-accrual loans increased to 1.18% of total non-310-30 loans driven by one relationship that is well secured and making principal and interest payments as originally structured. Overall loans with adverse credit ratings continued to decrease in both absolute terms and as a percent of our total loans.

We have continued to invest in commercial underwriting talent to support our increased origin activity. Our end to end commercial credit system implemented in mid-2013 has delivered efficiencies while providing enhanced credit portfolio reporting. We have maintained consistent underwriting of both commercial and consumer loans. Given our approach to doing business and the solid performance of the loan portfolio, I remain confident in our excellent credit quality.

During the second quarter we had continued success in reducing our non-strategic loans while delivering improved economic outcomes. As a reminder these distress loans acquired through our purchase of failed banks were deeply discounted at purchase and many of these loans carry the additional protection of the coverage under FDIC loss share agreements. Non-strategic loans were reduced at a 41% annualized rate during the quarter to $288 million at June 30, 2014. Our special assets team continues to focus on resolving the most trouble assets within our portfolio and our pipeline of loan collections and OREO sales for the balance of 2014 are very robust. Our 310-30 loan pools are composed entirely of loans acquired through our three failed bank purchases. Our quarterly re-measurement of the expected cash flows from these loans resulted in $12.2 million in accretable yield tick up.

It’s important to note that these loan pools had original book balances of nearly ($1.7) billion and as of June 30, 2014 these balances have been reduced 78% to $358 million and the cumulative life to-date accretable yields tick up is $185 million against impairments of only $25 million. And as Tim said that results in net economic gain of $160 million. This reflects our conservative day one acquisition marks and the excellent results of our problem loan work out efforts. To summarize, we continue to deliver strong organic loan growth while adhering to our disciplined underwriting standards, credit quality remains excellent and our pace of problem asset resolution remains strong with results better than our original credit marks.

I will now turn the call over to Brian Lilly, our Chief Financial Officer.

Brian Lilly - Chief Financial Officer

Thank you, Rick and good morning everyone. There is a lot to like in the results of the second quarter. Tim and Rick highlighted the record loan originations that led to strong loan growth, the managing down of the non-strategic assets for strong returns and the continued excellent credit quality. We also grew banking fee income and delivered expenses better than our expense targets. Net interest income decreased slightly in the quarterly comparison given the decreases in the high yielding purchase loans, but it is nice to have most of the impact offset by new loan originations. As you can see, we are moving the financial leverage in a positive direction.

As we discussed last quarter, one analysis that we used to evaluate the progress of our building efforts and to get more insight into the financial results that are expected to emerge over time is to exclude the impact of the FDIC indemnification asset amortization, FDIC loss share income, and the large expense related to OREO and problem loan workouts, which can be seen in our non-GAAP reconciliation in the earnings release. These items negatively impacted the second quarter by a net $0.09 per share. Driven by the expiration of the FDIC loss sharing agreements over the next couple of years and the decreasing problem asset workout expenses, the negative impact will fluctuate on a quarterly basis, but will generally decrease over time.

The net $0.09 per share had a 35 basis point negative impact on our reported return on tangible assets. The adjusted $0.14 per share and 60 basis points return on tangible assets provides better clarity to our progress towards reaching our goal of 1% return on tangible assets. Further, it is rewarding to see that once the adjusted return on tangible assets improve on a year-over-year basis, increasing 10 basis points from 50 basis points for the six months of 2013 to 60 basis points this year.

Turning to loans, we grew total loans for the fourth consecutive quarter. Quarterly loan originations reached a record level exceeding our quarterly goal of $215 million, more than offsetting the decrease in the non-strategic loans that resulted in a total loan growth of $126 million or 26% annualized. The originated loan portfolio now comprises 70% of total loans thereby strengthening the sustainable income from client relationships. We have remained disciplined on loan pricing with the weighted yield on new originations of 3.8%, while a healthy 65% were variable rates supporting our asset sensitive position. Our pipelines are strong and we reiterate our goal of $1 billion in originations for 2014.

In terms of deposits, new clients additions led growth in our demand deposits of 14.9% annualized. And another quarter of very solid linked quarter growth in average transaction deposits of 5.1% annualized. Average total deposits in client repurchase agreements came very close to the inflection point decreasing just $10 million from our first quarter on a $3.9 billion total deposit base. Consistent with our prior guidance, we expect some continued runoff in the time deposits before growing total deposits in the back part of 2014, pleased with the stability of total client funding and to have transaction deposits reaching 63% of total deposits as of June 30.

Our high quality $2.2 billion mortgage-backed investment securities portfolio continues to perform as expected. We did not add to the portfolio during this year and its cash flowed as expected. The yield remained consistent with the first quarter of 2.2%. The duration improved slightly to a very acceptable 3.4% and given the holdings, the duration stays within 4% even with a 300 basis points shock.

Net interest income totaled $42.4 million in the second quarter and decreased $924,000. As you know, there are many moving pieces in remixing the earning assets and their associated yields. Loan originations in the investment portfolio are tracking as expected, but the payment and payout pace of the higher yielding purchase loans has been a little faster than anticipated. The irony is that we worked very hard to get many of the purchase loans to payoff, but their decrease has an outsized impact on the interest income due to the higher yields realized.

In addition, the re-measurement of the 310-30 loans added $12 million of accretible yield during the quarter. However, the benefit will be realized in later years as the timing of the increased cash flow estimates lengthened. These factors caused the net interest income to decrease slightly with the net interest margin following. Going forward in 2014, we continue to expect a flattening of the net interest income, but this expectation will be influenced by the payoff pace and yields on the purchase loan portfolios. Given our expectation for a slightly increasing earning asset base and the collection pace of the 310-30 loans, we expect a slight narrowing of the net interest margin in the range of 5 basis points free to the last two quarters of 2014. Rick addressed the excellent credit quality, and I would only add that we expect these trends and costs to remain strong in 2014. We have planned for a non 310-30 net charge-offs to be in the range of 10 basis points to 15 basis points in the coming quarters with the allowances for loan loses increasing slightly as a percentage of loans.

Turning to non-interest income the quarter totaled $2.2 million, the traditional banking related fees totaled $7.5 million and increased to nice 8.3%. This increase was broad-based across fee income sources. The FDIC loss share related income accounts totaled a negative $6.6 million. The FDIC indemnification asset amortization was $6 million, and was slightly higher than our prior quarterly guidance due to the favorable 310-30 re-measurement results in the second quarter as the client cash flow projections increased.

As a result of the second quarter re-measurement the quarterly FDIC indemnification asset amortization is expected to be $5 million in the third and $3.3 million in the fourth quarter. Of course these amounts will change with each quarter’s re-measurement and we will update you each quarter. The other FDIC loss sharing income was a negative $649,000 as we accounted for the sharing of gains on the recovered assets increased the FDIC callback liability for the better cash flow projections and built for expenses sharing on the covered assets. To my comment regarding the negative impacts within non-interest income the line items of FDIC indemnification asset and amortization, FDIC loss share income, OREO income and gains on previously charged off required loans net to a negative $5.4 million or a negative $0.075 per share. Total expenses were $39.9 million and included operating expenses of $38 million. OREO and problem loan expenses of $2.5 million and a $0.6 million benefit from the decrease in the warrant liabilities.

As we previously guided, we experienced a seasonal increase in the marketing expenses from the first quarter related to the timing of various marketing campaigns. We are very pleased to deliver operating expenses at the lower end of our prior guidance of $38 million to $39 million as well as OREO and problem loan expenses achieving a quarterly target of $2.5 million. For the remainder of 2014, we look for operating expenses to be consistent to better than the second quarter level of $38 million as we worked to realize additional expense efficiencies. We are reaffirming our prior guidance for OREO and problem loan expenses of approximately $10 million for the full year, but would add that these expenses can vary significantly quarter-to-quarter.

In the adjusted earnings per share that I discussed earlier the negative impact from the OREO and problem loan expenses was $0.035 per share. The adjusted efficiency ratio of 73% is noteworthy. As it is more reflective of the current revenue expense relationships and it speaks to the additional potential as we were to lower that ratio to our goal of 60%.

Capital ratios remain strong. Tangible book value per share ended the quarter at $18.53 increasing $0.09 from the end of the first quarter as available for sale fair value marks moved in a positive position. We are very pleased with the 4.2% of shares repurchased during the quarter at attractive prices bringing the total repurchases to 19% of shares outstanding. You saw last week that we authorized an additional $15 million share repurchase program. We continue to keep open all the capital deployment strategies including supporting organic growth, additional share repurchases, mergers and acquisitions, and dividends.

Tim that concludes my comments.

Tim Laney - President and Chief Executive Officer

Thanks Brian. Before closing I will share some thoughts on our current stock price, M&A and capital management. There is no question that the resolution and reduction of the acquired loan pools mask our core progress. It’s also challenging at times to appreciate how the successful resolution of these loan pools negatively impacts the income statement in the short-term, but as you know if you exclude the impact of the non-cash expenses associated with the FDIC amortization and normalized loss share and workout expenses, one can see that we are making solid progress toward our goal of achieving a 1% return on tangible assets. We believe our positive earnings trajectory will become increasingly clear as we could execute our organic plan and prior acquisition-related expenses diminish. We believe that current and recent stock prices undervalue our earnings trajectory and represent a unique opportunity to buy our shares at favorable valuations.

To that end, we have now repurchased 19% of our outstanding shares at a weighted average price of $19.70. We have recently announced as Brian mentioned, another $50 million authorization for additional repurchases and will continue to opportunistically buy in shares. We will do this while managing our capital position within the context of organic growth, acquisition opportunities and of course regulatory requirements.

Finally, we continue to be disciplined around acquisition opportunities and we will only execute a transaction that is financially sound and that it enhances our long-term shareholder value. And on that note, we are ready to open up the lines for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Paul Miller with FBR Capital Markets. Your line is open.

Paul Miller - FBR Capital Markets

Yes, thank you very much. Can you talk a little bit about the – the loan growth I thought was very impressive this quarter? Can you talk a little bit about on what geographically and what industries that you guys had the most success with?

Rick Newfield

Sure. Paul, this is Rick Newfield. So, well here is the really good news as we put ourselves in very good markets. We feel we continue to have for the most part rational competition. We are seeing opportunities broad-based across the Midwest, across Colorado and in Texas. Specialized is contributing really at the rate you would expect, given the investments we have made in those areas, so, again, very granular and very broad-based.

Paul Miller - FBR Capital Markets

So, I mean, is there anyone in – I know like energy in the Midwest has done very well, is it focused on energy, is it energy-related, or is it just across the board just….

Rick Newfield

Really across the board, absolutely. I will remind you, Paul, we have very specific, very stringent sector targets in place that are actually quite granular. So, while we see a lot of the energy and related opportunity you are referring to, we are not going to allow ourselves to overweight in any one particular sector. The good news as Rick has said, we are seeing nice sound opportunity across both our geographic markets. And again, we would much rather swim with the tide than against it. So, it’s nice to be in healthy markets. And we feel like the business we are seeing across the specialty businesses that we have now lifted out and built are performing as good as our better than expected.

Paul Miller - FBR Capital Markets

And then going to the M&A front, you are starting to see some deals, not big deals, but some deals start to get done. And you made some comments about that, but I mean, is people’s pricing coming down at all? Is it still the sellers are just not really willing to sell anything below like two times book or something like that?

Brian Lilly

Yes. I think Paul as we have talked about on the call there wasn’t any data points in our marketplace. And we have been having a lot of conversation, but there has been in the second quarter a couple of data points that traded above that two times. Certainly, very interesting properties from our standpoint, but that’s – those would be a stretch for us. And unless we can figure out a way to make a lot more money out of a two times tangible book value, it’s not going to hit our return criteria, so that the pricing isn’t coming down. If anything is felt like it’s gotten to a little bit of a higher point, but you have been in this business for long time and the one thing that things come your way that you just don’t expect. So, we are out there. We are talking. We have good conversations going on. Some of the boards, you can feel the management teams have been riding these last couple of years of a very good economy. And the timing is coming up. You can feel it.

Paul Miller - FBR Capital Markets

And are you – I mean, I know, couple of years ago, you were talking about like extending up into Iowa and Midwest, what areas have you been really looking currently? Are you trying to just stay in the Denver Kansas City or are you moving other states?

Tim Laney

Look, we really believe that the best long-term – the best path to creating long-term value is going to be building now in our existing markets or we would say truly contiguous markets, but this idea of jumping into Ohio, or jumping multiple states away is just not part of our strategy. We really like the idea of either building through acquisition lift out organically greater market share in the markets we chosen to do business.

Paul Miller - FBR Capital Markets

Okay. Hey, guys, thank you very much.

Tim Laney

Thank you, Paul.

Operator

Your next question comes from Chris McGratty with KBW. Your line is open.

Mike Pareto - KBW

Hey, guys. This is actually Mike Pareto stepping on for Chris.

Tim Laney

Good morning, Mike.

Mike Pareto - KBW

Good morning. I thought – appreciate the NIM guidance for the next couple quarters, I was wondering just kind of a follow-up to that, if you guys are expecting to see NII inflect in the back half of the year and if so, do you think that it can remain kind of a consistent trend given your loan growth traction you guys have seen over the past few quarters?

Brian Lilly

Yes, Mike, the NII at that $42 million is something that we’ve been bouncing right around that inflection point here and as we look to the next couple of quarters that really is the purchase portfolio that’s going to move. The investment portfolio and our loan origination machine is really performing as we expected. We did have a little bit quicker than pay down and again that irony that I mentioned, let’s get out of the non-strategic assets, but they are yielding very strongly can have an influence quarter-to-quarter. So, running assets at near where we are today closed to is something that we would expect, but it will be influenced by the purchase. I wouldn’t be surprised if it drops just a little bit from there, but as we go forward into the ‘15 and ‘16 that’s where you really model it out and you can cleaned out a lot of the non-strategic assets in that, that numbers starts to track better with earning assets.

Mike Pareto - KBW

Okay. So just to make sure I heard you correct, still some volatility in the next – in the near-term here that could send it plus or minus a little bit. But, year-over-year, in ‘15 and ‘16, you’re expecting NII dollars to grow.

Brian Lilly

Yes, as we go forward. But sitting here in ’14, we’re in that inflection year.

Tim Laney

Mike, and you know this, but just something to watch is just the size of the remaining non-strategic portfolio, obviously coming down rapidly. We want to come down rapidly and we really do believe to Brian’s point, we’re just a few quarters away from seeing the vast majority of that portfolio having moved away from us so, from an income standpoint, it will be nice because there will be a point here where we’re no longer dealing with the negative impact of the amortization, the reduction of that FDIC receivable, right, so, that’s another component to what you’re asking about that I think is very important.

Mike Pareto - KBW

Okay, thanks. And then, just one more question kind on the moving pieces of the balance sheet. The deposits you guys are remixing and the non-interest bearing growth was nice and obviously the loan originations have been strong. Over the last few quarters, it’s probably been about an $80 million to $100 million decrease on a quarterly basis in the securities portfolio. Do you guys, just trying to match the size of the balance sheet here. Do you guys expect that trend to generally continue or as you guys go in the back half of the year here?

Brian Lilly

No. The investment portfolio has been delivering as we guided about that $400 million annual cash flow for this year and as we look at over the next four quarters, given the rate environment, there is some volatility that happens with that, but it was built to supply funding for loan growth on the origination side. So it’s performing as expected. From a total asset standpoint, we were bouncing around that $4.9 billion, and we’ll stay close to that as we expand the earnings assets just slightly this year, but then you really start to see it traction with the originated portfolio growth as we go forward.

Mike Pareto - KBW

So on a dollar basis then, are you guys comfortable with the current size of your investment portfolio or do you think there is still additional room for that to moderate further?

Brian Lilly

The guidance that I have given, Mike is that we are not adding anything to the investment portfolio. So it’s all run off, if that answers your question.

Mike Pareto - KBW

Yes, yes.

Brian Lilly

Yes. We are replacing that with the strong originations each quarter. We are using – we are strengthening the earning asset mix by reducing the investment portfolio and the non-strategic assets and we are replacing those with our originated portfolio. So the earning assets are running in place here for a while. But certainly the sustainability of the income that’s resulting from that is much more powerful and valuable.

Mike Pareto - KBW

Right, yes. I am just trying to get a sense because the loan growth is about $1 billion of originations, so you are going to grow the balance – the loan book rather pretty quickly, I was just trying to get a sense of I guess what looking out maybe over the next six quarters, how you feel about your liquidity position with that securities book if like the current – I guess that’s more of what I was going after?

Brian Lilly

Yes. No, I now feel very good about that portfolio and also the non-strategic run-off. And then adding the $1 billion production, we would expect the earning assets to grow and the funding side has been delivering as we expected too. So knock on wood everything is working very well.

Mike Pareto - KBW

Alright. Great. Thanks guys. Thanks for taking my questions.

Tim Laney

You bet, Mike.

Operator

Our next question comes from Tim O’Brien with Sandler O’Neill. Your line is open.

Tim O’Brien - Sandler O’Neill

Good morning.

Tim Laney

Good morning Tim.

Tim O’Brien - Sandler O’Neill

So first question, so you hit your goal, $250 million in originations, you topped that goal, Tim does that mean that you reset and set a new goal higher, or does that mean you sustain their and price higher or kind of where are you – can you give us a strategic take now?

Tim Laney

We realized we must be one of the more boring earnings calls out there, because we are a bit of a broken record. But we have talked pretty consistently about ultimately looking for our complement of 58 commercial bankers to on average hit that $15 million on annual production. We have talked about the goal of on average seeing our banking centers through a consumer and small business originations ramp up to $4 million a year in average production. And again, keep in mind roughly 100 banking centers. If you do that math, it will tell you that our true expectation is that, as this company matures, as our bankers – our experienced bankers’ season with us that we truly expect to exceed that $1 billion in annual production. And now that would be my answer, Tim.

Tim O’Brien - Sandler O’Neill

That’s great.

Rick Newfield

Tim, this is Rick. I might add, if you look at the steady methodical climb we have had in our originations you will also note that we will not and have not sacrificed credit quality for growth.

Tim O’Brien - Sandler O’Neill

I am aware of that. And you guys have articulated that consistently for the past several quarters, or since I have been covering. So really since the IPO, so you have talked a lot about credit, but one question that I have for Brian is you mentioned weighted average yield on production this quarter was – did you say 380 basis points?

Brian Lilly

Yes. 3.8%.

Tim O’Brien - Sandler O’Neill

Do you happen have the number from last quarter, remind me, I am sure you gave it last quarter, I just don’t have it in front of me?

Brian Lilly

Okay, good. That’s asked at the last couple quarters. But we had about 4% in each of the fourth quarter and the first quarter and a little bit lower here in the second quarter. Nice strong heavy weighting to the variable at the 3.8%. I am actually – we are all very excited about having the heavy variable rate component and still delivering 3.8%. So that feels very good.

Tim O’Brien - Sandler O’Neill

So really, what you are saying is that the sequential decline related to kind of the mix of fundings that took place?

Brian Lilly

Yes. No, it’s I looked at the books very similarly. And a lot of it’s influence by the amount of variable and affects of terms you have – and that’s been a focus for us.

Tim O’Brien - Sandler O’Neill

And conversely, no, changes really or accommodations or relaxing in pricing incrementally this quarter relative to last quarter?

Brian Lilly

I will let Rick talk to the terms, but from a pricing standpoint, we feel very consistent in our thinking. And our markets, as we have shared with you, have been more promotional than maybe some of it’s experienced in the East Coast and other places of the past. But it feels very good here in the Midwest. And Rick?

Rick Newfield

Sure Brian. And Tim I will just reiterate and again we are fortunate to be in markets that not only are strong, but where the competition for the most part remains rationale and therefore, we are able to maintain those standards, no doubt, there would be some opportunities we miss by holding those standards, but we’re comfortable with that.

Tim O’Brien - Sandler O’Neill

Good. And then, I guess my last question is, are you – and this would be for you, Rick – have you guys hit or are you approaching any of those, kind of caps that you talked about that were, I guess related to any specific sector or such and are you guys going to top out here, given the growth that you’ve put on or r do you still got plenty of capacity? And those are – obviously, those are going to move as the overall portfolio grows, but – will you be constrained there at all?

Rick Newfield

No, there is not. And, Tim, actually, it almost points back to the question, Paul opened up with in terms of where we are seeing your originations in any concentration. And absolutely no concentration and we have plenty of room really across the spectrum of opportunities that we see.

Tim Laney

You always ask such great questions that it prompts probably another comment that we’re being asked more, more frequently and that’s – what’s our position on snicks, what out – should we be more aggressive with national purchase loans and what we’ve seen – while we certainly strategically allocated a certain amount of capital for the potential growth of snicks, we’re just not seeing the opportunities that really meet our credit criteria while achieving the pricing hurdle so, really national snick type business has been the minimums for us where – we’ll tend to be more involved in that businesses where we’re talking about a local relationship where we need to layoff some exposure and that exceeds our in house limits. But that’s just another example we believe of being able at be conservative to hold ourselves to certain pricing hurdles and still grow the business.

Tim O’Brien - Sandler O’Neill

Thanks, Tim, for the color on that. And, it’s kind of nice not to feel like you’d want to even look at snicks right now unless they were very, very compelling given how strong the organic business is. One last question, then I’ll end it. And that is, looking at the $15 million interest contribution from ASC 310-30 loans this quarter, on average just under $400 million in balances. Does that contribution go up kind of based on as we get to the tail end of the expected life of that book? Do we see kind of a ramp-up in interest captured there, even as the book shrinks on an absolute dollar basis here or is that going to taper off?

Brian Lilly

Tim, the way to look at it is as you were any other interest bearing security as we look at each quarter when we measure, we reset the amount of accretion comes in the interest. So, if you look at the interest yield of just under 16% on the balances. As the balances go down, that 16% would carry forward so, a relative similar amount, but on an absolute basis, a lower contribution. But I would mention as we’ve talked about a number of times here that there is a long life to those pools. They’re longer life to assets and that’s one of the challenges that we’re having, is that – we pick up $12 million in accretable yield this quarter and it has almost the zero impact to 2014 as those assets, cash flows are being benefiting future periods, but we’re picking up additional FDIC indemnification asset amortization, because we won’t be billing the FDIC because a large component of those 310-30s are covered assets. And so, we’ve got this mismatch in our income statement that works its way out of the time, but it’s certainly live today.

Tim O’Brien - Sandler O’Neill

Thanks for answering all my questions, guys, and enjoy the rest of your summer.

Brian Lilly

Thank you, Tim.

Operator

Your next question comes from Matt Olney with Stephens Inc. Your line is open.

Matt Olney - Stephens Inc

Hi, thanks, good morning guys.

Tim Laney

Good morning, Matt.

Matt Olney - Stephens Inc

Hey, you talked a lot about growth initiatives on the loan side, and it sounds like you’re getting some good traction there. On the fee income side, are there any initiatives that you’re working on there in terms of new products, or is it still kind of status quo?

Tim Laney

No, it’s a range of continuing to simply improve our performance on core products. Again keep in mind, these acquired banks had limited to no practices of providing fee-based products to their clients. And so part of our opportunity just represents getting to the industry normal fee income. And we certainly are looking at – well, we are probably not inclined for competitive reasons to talk about additional products. We are certainly in process, in fact of considering the expansion of our current fee product base.

Matt Olney - Stephens Inc

Okay. And then in prepared remarks, I believe there was a discussion that we should expect a slight build on the reserve ratio, reserve to loans, did I hear that correctly?

Tim Laney

Yes, it will happen pretty much on its own as you think about the mix of purchased assets and originated. And the originated has more of the normal accounting, where you are going to have an allowance that makes some sense. And certainly, when you buy purchased assets, they are zero coming across, right. So, as that balance comes down, we will have increased allowance coverage, but we are also looking to keep pace with the growth of that portfolio in our allowance calculations.

Rick Newfield

Hey, Matt, this is Rick. Just one other point, I think Brian alluded to, but within that purchased, we also have and this is separate from the 310-30 pools approximately $9 million of un-accreted mark, that’s really held against that purchase book. So, I think as Brian said, as that diminishes and we are more focused on the originated you will see that percentage coverage naturally increase.

Matt Olney - Stephens Inc

Yes, that makes sense. Okay, that’s all for me guys. Thank you.

Rick Newfield

Matt, thanks.

Operator

Thank you. And this concludes the Q&A session. I will now turn the call back over to Mr. Laney for his closing remarks.

Tim Laney - President and Chief Executive Officer

Thank you for joining us today. For those of you that ask questions, thank you for your thoughtful questions and have a good day.

Operator

And this concludes today’s conference call. If you would like to listen to the telephone replay of this call, it will be available beginning in approximately two hours and will run through August 8, 2014 by dialing 855-859-2056 or 404-537-3406 and referencing the conference ID of 68952826. The earnings release and online replay of this call will also be available on the company’s website on the Investor Relations page. Thank you very much and have a great day. You may now disconnect.

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