National Bank Holdings Corp (NBHC) 2014 Q2 法說會逐字稿

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.

(Operator Instructions)

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 US 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 the statements.

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

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'll share some thoughts on our outlook, as we did during quarter's call. And we'll 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 worked 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 portfolio 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're 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'll turn the call over to Rick Newfield, and he'll update you in more detail on both our acquired and originated loan portfolios. Rick?

Thank you, Tim, and good morning. I'll 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'll 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 16% over March 31, 2014, which has an annualized growth rate of 64%. We 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, lend, and acquisition and 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 continue to will underwrite to smart and prudent standards, with average FICO scores of 765. And the average funding for a residential loan was $110,000 during the quarter.

Turning to credit quality. I'm 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 1 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 carried the additional protection of 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 troubled 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 remeasurement of the expected cash flows from these loans resulted in $12.2 million in accretable yield pickup.

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 yield pickup 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 workout 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'll now turn the call over to Brian Lilly, our Chief Financial Officer.

Thank you, Rick, and good morning, everyone.

There's 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 purchased 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 levers in a positive direction.

As we discussed last quarter, one analysis that we use 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 and indemnification asset average station. 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 a 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 of 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 improved on a year-over-year basis, increasing 10 basis points from 50 basis points for the first six months of 2013, to 60 basis points this year.

Turning to loans, we grew total loans for the 4th consecutive quarter. Quarterly loan originations reached a record level exceeding our quarterly goal of $250 million. More than offsetting the decrease in the non-strategic loans, and 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 a weighted yield on new originations of 3.8%. While a healthy 65% were variable rate, 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 to an impressive growth in our demand deposits of 14.9% annualized. And another quarter of very solid linked quarter growth, and average transaction deposits of 5.1% annualized. Average total deposits and 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. We are very pleased with this ability 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 at 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 point 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 deals. Loan originations and the investment portfolio are tracking as expected, but both payment and payoff pace of the higher-yielding purchased loans has been a little faster than anticipated. The irony is, that we worked very hard to get many of the purchased loans to pay off, but their decrease has an outsized impact on the interest income, due to the higher yields realized.

In addition, the remeasurement of the 310-30 loans added $12 million of accretable 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 purchased 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 for each of 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 to 15 basis points in the coming quarters, with the allowance for loan losses 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 a 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 and amortization was $6 million, and was slightly higher than our prior quarterly guidance due to the favorable 310-30 remeasurement results in the second quarter as the client cash flow projections increased.

As a result of the second-quarter remeasurement, the quarterly FDIC indemnification asset and 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 remeasurement, 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 covered assets, increased the FDIC callback liability for the better cash flow projections, and billed for expenses sharing on the covered assets.

To my comments earlier regarding the negative impacts within non-interest income, the line items of FDIC indemnification and asset amortization, FDIC loss share income, OREO income and gains on previously charged-off or acquired 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've previously guided, we experienced a seasonal increase on the marketing expenses for the first quarter related to the timing of various marketing campaigns. We were 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 the 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 work 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 work 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 the available for sale fair value marks moved in a positive position.

We were 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 $50 million share repurchase program. We continue to keep open all of capital deployment strategies, including supporting organic growth, additional share repurchases, mergers and acquisitions, and dividends.

Tim, that concludes my comments.

Thanks, Brian. Before closing, I'll share some thoughts on our current stock price, M&A, and capital management.

There's no question that the resolution and reduction of the acquired a 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're 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 continue to 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've now repurchased 19% of our outstanding shares at a weighted average price of $19.70.

We recently announced, as Brian mentioned, another $50 million authorization for additional repurchases, and we'll continue to opportunistically by in shares. We'll do this while managing our capital position within the context of organic growth, acquisition opportunities, and of course regulatory requirements.

Finally, we continued to be disciplined around acquisition opportunities. And we will only execute a transaction that is financially sound, and that enhances our long-term shareholder value.

And on that note, we are ready to open up the lines for Q&A.

(Operator Instructions)

Your first question comes from Paul Miller with FBR capital markets, your line is open.

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?

Sure, Paul, this is Rick Newfield.

So look, here's the really good news. As we put ourselves in very good markets, we feel we can see they have for the most part rational competition. We're seeing opportunities broad-based across the Midwest, across Colorado and in Texas. Specialized is contributing really at the rate you'd expect, given the investments we've made in those areas.

So, again, very granular and very broad-based.

So is it 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 -- ?

Really across-the-board, absolutely. I'll 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're referring to, we're not going to allow ourselves to overweight in any one particular sector.

The good news, as Rick has said, we're 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're seeing across the specialty businesses that we've now lifted out and built are performing as good as or better than expected.

And then going to the M&A front, you're starting to see some deals. Not big deals, but some deals start get done, and you made some comments about that. But, is people's pricing coming down at all? Is it still the sellers are just not really willing to sell anything below like 2 times book or something like that?

Yes, I think, Paul, as we've talked about on the call, there wasn't any data points in our marketplace and we've been having a lot of conversation. But there has been, in the second quarter, a couple of data points traded above that 2 times.

Certainly, very interesting properties from our standpoint, but those would be a stretch for us. And unless we can figure out a way to make a lot more money out of a 2 times tangible book value, it's not good to hit our return criteria. So the pricing isn't coming down.

If anything, it felt like it's gotten to a little bit of a higher point. But, you've been in this business a long time, and the one thing that things come your way that you just don't expect.

So, we're out there, we're talking, we have good conversations going on. Some of the boards you can feel the management teams have been [writing] these last couple years that were very good economy, and the timing is coming up. You can feel it.

And are you -- I know, a couple years ago, you were talking about extending up into Iowa and the upper 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?

Look, we really believe that the best path to creating long-term value is going to be building out 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 outs, or organically greater market share in the markets we've chosen to do business in.

Okay. Hey, guys, thank you very much.

Thank you, Paul

Thanks, Paul

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

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

Hello, Mike.

Good morning, Mike.

Good morning.

I thought -- appreciate the NIM guidance for the next couple quarters. I was wondering though, just 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 a consistent trend, given your loan growth traction you guys have seen over the past few quarters?

Yes, Mike. When we -- 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, it 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, and can have an influence quarter to quarter.

So, running at that near where we are today close 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 2015 and 2016, that's where you really model it out. And you get cleaned out of a lot of the non-strategic assets, and that number starts to track better with earning assets.

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 2015 and 2016, you're expecting NII dollars to grow.

Yes, as we go forward. But sitting here in 2014, we're in that [inflexing] year.

Mike, and you know this, but just something to watch is just the size of that remaining non-strategic portfolio. It's obviously coming down rapidly. We want it to come down rapidly, and we really do believe, to Brian's point, that we're just a few quarters away from seeing the vast majority of that portfolio having moved away from us.

From an income standpoint, it will be nice because there'll be a point here where we're no longer dealing with the negative impact of the amortization. The reduction of that FDIC receivable. So that's another component to what you're asking about that I think is very important.

Okay. Thanks. And then, just one more question 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 as you guys go in the back half of the year here?

No. The investment portfolio has been delivering as we guided about that $400 million annual cash flow for this year. And as we look out 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 earning assets just slightly this year. But then you really start to see it traction with the originated portfolio growth as we go forward.

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

The guidance that I've given, Mike, is that we're not adding anything to the investment portfolio, so it's all run off. If that answers your question.

We're replacing that with the strong originations each quarter. We're using the -- we're strengthening the earning asset mix by reducing the investment portfolio, and the non-strategic assets, and we're 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.

Yes, I'm just trying to get a sense because the loan growth is about $1 billion of originations. So you're 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.

Yes. No, I know feel very good about that portfolio, and also the non-strategic run off. And then adding the $1 billion of 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.

All right, great. Thanks, guys. Thanks for taking my questions.

You bet, Mike.

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

Good morning,

Good morning, Tim.

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 where you -- give us a strategic take now.

We realized we must be one of the more boring earnings calls out there, because we're a bit of a broken record. But, we've talked pretty consistently about ultimately looking for our complement of 58 commercial bankers to on average hit that $15 million in annual production.

We've 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 that would be my answer, Tim.

That's great.

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

I'm aware of that. And you guys have articulated that consistently for the past several quarters, or since I've been covering. So, or really since the IPO, so you've 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?

Yes 3.8%. Sure.

Do you happen have to have the number from last quarter? Remind me, I'm sure you gave it last quarter. I just don't have it in front of me.

And you're the one that's asked it 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. A nice strong heavy weighting to the variable at the 3.8. I'm actually -- we're all very excited about having the heavy variable rate component, and still delivering 3.8%. So that feels very good

So really, what you're saying is, that the sequential decline related to the mix of fundings that took place --

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

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

I'll let Rick talk to the terms. But from a pricing standpoint, we feel very consistent in our thinking. And our markets, as we've shared with you, have been more [pronational] 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. Terms, Rick?

Sure, Brian. Tim, and I just reiterate again, we're fortunate to be in markets that not only are strong, but where the competition for the most part remains rational. 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.

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 caps that you talked about that were 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 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?

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 the originations in any concentration. And absolutely no concentration, and we have plenty of room really across the spectrum of opportunities that we see.

Tim, you always ask such great questions that it prompts probably another comment that we're being asked more and more frequently. And that's, what our position on [snicks]? Should we be more aggressive with national purchased loans?

And what we've seen, while we've 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 hurdles. So really, national snick type business has been diminimus 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 lay off some exposure that exceeds our in-house limits. But, that's just another example we believe of being able to be conservative, to hold ourselves to certain pricing hurdles, and still grow the business.

Thanks, Tim, for the color on that. And, it's nice not to feel like you'd want to even look at snicks right now unless they were 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 ASCII 310-30 loans this quarter, on average just under $400 million in balances. Does that contribution go up based on as we get to the tail and of expected life of that book? Do we see 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?

Yes, Tim, the way to look at it is, as you would any other interest-bearing security. As we look at each quarter and we remeasure, we reset the amount of accretion that comes in 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. And 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's a long life to those pools. They're longer lifed 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 a 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 over time, but it's certainly live today.

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

Thank you, Tim.

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

Hey, thanks. Good morning, guys.

Good morning, Matt.

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 status quo?

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 norm on fee income. And we certainly are looking at -- well we're probably not inclined for competitive reasons to talk about additional products. We're certainly in process, in fact, of considering the expansion of our current fee product base.

Okay. And then, in the 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?

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're going to have an allowance that makes some sense.

And certainly, when you buy purchased assets, they're zero coming across, right? So as that balance comes down, we'll have increased allowance coverage. But we're also looking to keep pace with the growth of that portfolio in our allowance calculations.

Hey, Matt, this is, Rick.

Just one other point, and I think Brian alluded to it, but within that purchased we also have, and this is separate from the 310-30 pools, approximately $9 million of unaccretive markets that's really held against that purchase book. So I think as Brian said, as that diminishes and we're more focused on the originated, you'll see that percentage coverage naturally increase.

Yes. No, that makes sense. Okay. That's all for me, guys, thank you.

Bye, Matt. Thanks.

Thanks, Matt.

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

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

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.