National Bank Holdings Corp (NBHC) 2014 Q4 法說會逐字稿

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2014 fourth-quarter earnings call. My name is Johnna and I will be your conference operator for today.

(Operator Instructions)

As 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 margins, 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 must 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 these statements.

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

Thank you, Johnna. Good morning and thanks for joining the National Bank Holdings fourth-quarter earnings call. I have with me our Chief Financial Officer, Brian Lilly, and Rick Newfield, our Chief Risk Management Officer. During this call, we will review our fourth-quarter performance as well as share some observations on the full year. Brian will also cover our outlook for 2015 and Rick will provide an update on the outstanding performance of both our strategic and non-strategic loan portfolios.

Turning to the fourth quarter, we finished out 2014 realizing 17% year-over-year spot loan growth and 30% growth in our strategic loan portfolio. While loan production moderated slightly during the second half of 2014, we attribute this to our conservative credit culture versus any broad concerns with the markets where we do business. We remain very focused on building and maintaining a diverse and conservatively underwritten loan portfolio with excellent credit quality and there's probably no better evidence of this than the fact that we experienced only six basis points of charge offs for the full year.

With respect to the acquired loan portfolios, we are now down to the last $200 million or so from a starting point of almost $2 billion. While we're pleased with the resolution of these portfolios, it's ironic that the stronger than expected performance will continue to put pressure on GAAP reported earnings as the pace of the FDIC indemnification asset amortization continues to accelerate. As a side, I have to share with you that while it is a non-cash expense, we continue to find it somewhat challenging that the excellent performance of these acquired portfolios actually puts negative pressure on GAAP reported earnings.

Now turning to the deposits, we continued to grow our low-cost deposit base while shrinking the higher cost CD portfolio, banking-related fee income was solid for the quarter and we are optimistic about its continued potential for growth. We also remain sharply focused on expense management and Brian is going to be sharing some details with you around a strategic action that we have taken that will not only enhance our product and service offerings but also meaningfully reduce our operating expenses as we look ahead. On that point, I'll stop and -- at least for now, and ask Rick to take a deeper dive into the performance of our loan portfolios. Rick?

Thank you, Tim, and good morning. First, I'll provide a summary of loan origination activity for 2014. Second, I'll discuss facts regarding our solid credit quality, as well as our limited exposure to oil and gas loans. Third, I will discuss our success this past quarter in reducing non-strategic loans, summarize of those efforts for 2014 and the continued positive economic benefits generated through those efforts.

Originated loan portfolio totaled $1.6 billion at December 31, 2014, an increase of $46.1 million, or 11.4% annualized growth, over September 30. For the full year, we grew originated balances $563 million, or 52%, over the prior year end. We've delivered these results while remaining disciplined in our underwriting and credit structuring. During the fourth quarter, we continued to drive growth with a granular mix of consumer and commercial loan types. Combined, commercial and industrial agriculture and owner-occupied commercial real estate make up 58% of our originated portfolio, residential mortgage loans make up 29%, non-owner-occupied commercial real estate 12% and other consumer loans, 1%.

For the full year 2014, we originated $869 million in new loans. Commercial originations of $712 million were granular, averaging $969,000 per relationship. Consumer originations were $157 million, principally driven by residential that averaged $110,000 per loan, and an average LTV of 64%, averaged FICA of 763.

Turning to credit quality, I'm pleased with the performance of our non-310-30 loans, which totaled $1.9 billion at December 31. Net charge offs in this portfolio, as Tim said, were just six basis points for the year. 90-day past dues remained immaterial. Non-performing loans comprised of non-accruals and restructured loans on non-accrual decreased nicely from 1.02% at September 30 to only 0.57% of total non-310-30 loans at December 31, 2014, as we had meaningful pay downs and payoffs on non-accrual's. Overall, our credit quality remains steady and strong, with adversely related loans continuing to decrease in both absolute terms and as a percent of total loans.

With our presence in Colorado and our limited presence in Texas, one might have questions on the energy sector. Because of our continued commitment to build and maintain a well-diversified loan portfolio with prudent concentration limits, energy sector loans were just $176 million as of December 31, 2014. Each energy client was selected for its strong balance sheet, low leverage and management quality. From day one, we approached the energy sector recognizing that price volatility is a part of the industry. We built our energy banking team with experienced energy bankers, experienced energy credit underwriters, including a petroleum geologist.

Our loan structures have protection against oil and gas price risk using downside scenarios in our borrowing bases and asset base lending structures for clients in the services sub-sector. As part of our ongoing portfolio management practices, we've completed an extensive review of all energy clients within the last 30 days. We've looked at further stress on price, hedging programs in place, client liquidity and their balance sheet strength. Our analysis gives me confidence in the quality of the portfolio we've built and the ability of our clients to manage effectively through a protracted trough in oil prices. As we turn the calendar to 2015, I remain confident in our ability to maintain excellent credit quality.

Our resolution of acquired problem loans in assets continues to be a great story. During the fourth quarter, reductions in non-strategic loans accelerated while continuing to deliver favorable economic outcomes. As a reminder, these distressed loans acquired through our purchase of failed banks, were deeply discounted at purchase and many of these loans carry the additional protection of coverage under FDIC loss share agreements. Our special assets team continues to focus on resolving the most troubled assets within our portfolio and the pace of resolution of non-strategic loans accelerated during the quarter to a 78% annualized rate.

As Tim said, we ended the quarter with just $202 million in non-strategic loans. This is down from $350 million at December 31, 2013, a reduction of $148 million for the year, or 42%. Additionally, OREO balances were reduced to $29 million at year end, down an impressive 58% from year end 2013. It's important to note that non-strategic balances are now less than 10% of total loans. While we expect to maintain our current pace of resolutions, the dollar impacts should be lower given the lower dollar value of the remaining non-strategic loans.

Our 310-30 loan pools are composed entirely of loans acquired through our three failed bank purchases. Our quarterly re-measured expected cash flows from these loans resulted in $14.6 million in accretable yield pick up. Cumulatively light to date, the accretable yield pickup is $210 million against impairments of only $24 million, resulting in net economic gain of $186 million. I believe this demonstrates the effectiveness of our problem loan workout efforts.

To summarize, we delivered solid organic loan growth in 2014 while adhering to our disciplined underwriting standards. We're committed to building and maintaining a loan portfolio with outstanding credit quality and we will not sacrifice our standards for short-term loan growth. With that, I'll turn the call over to Brian Lilly, our Chief Financial Officer.

Thank you, Rick, and good morning, everyone. As you saw in our release yesterday, we continued to deliver solid loan originations, managed down the non-strategic assets for attractive returns and maintained excellent credit quality. We also grew banking fee income and delivered expenses better than our targets. The quarter contained a few unusual items that I will cover in my comments.

Let me first briefly cover the fourth quarter, then turn to some detailed guidance for 2015. We covered a lot of detail in the release, so I will limit my comments to the trends in our adjusted profitability analysis, loans, FDIC loss share related, and expenses. Of course, feel free to ask questions in the Q&A portion.

Over the past year we have shared a quarterly adjusted profitability analysis that is focused on the underlying operating results that are expected to emerge over time. The adjustments that we make in this analysis are shown in the non-GAAP reconcilement tables of our earnings release, the largest of which relates to the non-cash FDIC amortization expense and cost the fourth quarter $0.12 per share. On this adjusted basis, we realized record quarterly adjusted profitability of $0.19 per share and generated a 71 basis points return on average tangible assets.

The $0.02 increase over the third quarter was primary driven by higher net interest income. A key driver to the higher interest income was $0.9 million in prepayment fees realized on the exit of some agricultural credits and a $0.8 million one-time acceleration of interest in the 310-30 loan pool. Solid loan originations added to our strategic loan portfolio, which increased $40 million, or 8% annually, over the third quarter. On a year-over-year basis, strategic loans grew a very strong $457 million, or 30%.

Total loans outstanding ended the quarter basically flat with the third quarter due to higher levels of payoffs and pay downs, as well as an excellent progress exiting the non-strategic loans. We see that this activity as the normal absent flows of credit and do not see a trend. We like our current pipelines and we expect to deliver on our goal of $1 billion originations in 2015.

FDIC loss share related non-interest income totaled a net expense of $14.2 million and was $7 million higher than the third quarter. The primary driver of the higher net FDIC loss share expense was a $6.2 million sharing on high levels of OREO gains realized during the quarter. The actual OREO gains of $10.4 million are netted against expenses in the income statement, but the FDIC sharing portion's recorded in the non-interest income accounts. Additionally, we did increase the indemnification asset amortization $0.8 million from our prior guidance due to better covered asset performance.

Operating expense is delivered within our prior guidance of $38 million and was consistent with the third quarter. However, total expenses showed a significant decrease of $4.8 million. The primary driver was a $10.4 million OREO gains netted against OREO expenses and was partially offset by a $4.1 million contract termination accrual and a $1 million less benefit from the changes in the warrant liability. As Tim mentioned, we are very excited for the strategic and financial benefits of changing our core operating system. From a financial standpoint, the cash payback is less than a year. The lower run rate costs will benefit 2016 and beyond. That's completes my comments on the fourth quarter.

Now let's turn to our outlook for 2015 and start with an economic backdrop. Our economic assumptions are consistent with the current outlook of leading economists, which includes slightly improving GDP growth and unemployment, although we have not included an interest rate increase in our 2015 planning. Given our asset-sensitive position, we would benefit from an increase in interest rates, but we felt that an interest rate increase is more uncertain.

In 2015, pursuant to our adjusted profitability analysis, we are projecting the adjusted earnings per share and return on average tangible assets to be similar to 2014 as we continue to remix the earning assets and offset decreasing net interest income from the very high yielding purchased loans, with expense management and banking fee growth while maintaining an excellent credit quality. We protect that a significant amount of the earning assets remixing and adjustment items will burn off in 2015, leading to our goals of higher returns in 2016 and ultimately a return on average tangible assets of 1% in 2017.

Let me add a few more guidance specifics to the line items driving the adjusted profitability results before continuing with guidance on FDIC loss share related, OREO problem and loan costs, the impact of the one-time cost of conversion, tax expense, and share repurchase activity. Our loan originations goal is to achieve $1 billion in 2015. I think that you appreciate our strategy to achieve this goal. Specifically, we have focused on building a relationship client base that is granular in nature, with small and mid-sized businesses and consumers.

We have credit guidelines limiting concentrations across industries, a conservative house limit and generally have not found the shared national credit and large investment real estate segments attractive. We realize that it takes time to build a loan portfolio in this way, but we feel that the client relationship banking strategy delivers recurring and predictable income with a lower risk profile over time.

We expect total loans to grow in a range of 15% to 25% for the year and we'll be influenced by any unusual pace of non-strategic and strategic loan payoffs and pay downs as well as the level of originations. As you know, credit quality has been excellent and we protected continued strong performance. The provision for loan loss expense guidance would be based on supporting loan growth and continuing low charge offs in the range of 10 to 15 basis points. We are projecting that 2015's earnings assets will be relatively flat with 2014, in the range of $4.4 billion to $4.5 billion, as we do not see attractive opportunities for adding long-term investment securities in this rate environment. The growth in total loans will continue to be funded by cash flows from the investment securities portfolio and reductions in the non-strategic loan portfolio.

In terms of deposits and client repurchase agreements, we see transaction deposits growing in the mid-single digits, led by growth in demand deposit balances. Given our lack of incremental funding needs, we see time deposits shrinking, so the total deposits and client repurchase agreements are relatively flat year over year. Net interest income is expected to decrease slightly versus 2014, as the high-yielding purchased 310-30 loans paid out. We are projecting quarterly net interest income in the range of $39 million to $41 million. We are also projecting a net interest margin in the range of 3.65% to 3.75% with a slightly declining trend during the year owing to decreasing 310-30 loans currently yielding 19%.

Led by our business client fee income growth, higher levels of loan swap income and higher gains of sales of mortgages, we are projecting banking fee income growth in the mid- to high-single digit on a year-over-year basis. We continue to identify expense efficiencies and are projecting our operating expenses to be in the quarterly range of $37 million to $38 million as we have offset the normal expense increases with identified reductions. Upon the completion of the core system conversion in the fourth quarter, we are projecting a further reduction in operating expenses that will primarily benefit 2016 and beyond in the range of $4 million to $5 million annually.

The effective tax rate in 2014 for the adjusted profitability analysis was 35% and is projected to decrease to around 30% in 2015 due to tax effective strategies implemented this past year. That completes the build out of our assumptions for the 2015's adjusted profitability analysis and delivers earnings per share and return on average tangible assets that we believe provides a good launch into 2016.

Now let me turn to some guidance around the rest of the income statement for 2015, including the FDIC loss share related OREO and problem loan expenses, the conversion cost, and taxes. In 2014 as captured within the non-interest income section of our income statement, we incurred a net expense of $36.6 million related to the FDIC loss share agreements. This amount included $27.7 million of FDIC indemnification asset amortization expense, $3.9 million claw back liability expense, and a net expense of $5 million related to the sharing of work out expenses and gains on OREO.

For 2015 we are projecting a net expense range of $23 million to $33 million with a bias toward the higher end of that range. The large range is primarily driven by the amount of FDIC indemnification asset amortization, which has increased over the past several quarters due to the better covered assets performance and the ever-decreasing time to the end of the loss share agreements. Recall it this asset has to be resolved by the fourth quarter of 2016 through either loss share billings to the FDIC or a write down of the FDIC indemnification asset through amortization expense.

OREO and problem loan expenses have decreased nicely over the past few years. Our guidance for 2015 is a range of $4 million to $6 million. Of course, this expense varies significantly on a quarterly basis. In addition, we did realize $3.8 million in 2014 related to OREO income, shown within the non-interest income section of the income statement. Substantially, all of this income related to the properties sold in the fourth quarter and is not expected to recur in 2015. As mentioned, we're changing our core operating system late in 2015 and will incur one-time conversion cost of approximately $3 million to $4 million. Most of this cost is expected to be incurred in the fourth quarter 2015.

Just to be clear, the total expense guidance for the year, including the operating expenses, the OREO problem loan related, and the cost of the systems conversion would be in a range of $155 million to $165 million. This total slightly higher than 2014 as we're not expecting the re-occurrence of either the $13 million in total OREO gains or a $3 million benefit from a change in the warrant liability fair value.

In terms of taxes, we are estimating that the all-in tax rate of 30% for 2015, including a $1.9 million write off of a tax-deferred asset. Most of this write off, $1.7 million, is expected in the second quarter. The deferred tax asset write-offs relate to the expiration of prior stock awards of executives no longer with the Company. I would add that this would complete the write-downs related to these former executives. Finally, in terms of share repurchase activity we expect to complete the current remaining authorization of $30 million and remain opportunistic going forward. That completes the detailed guidance picture for you.

We have gone to this depth of guidance so that you can have a very good understanding of our expectations for 2015 and the important drivers of our progress to our return goals. The expected decrease year over year is driven by a combined estimated negative impact of $0.53 to $0.74 per share from the large net expense related to the FDIC loss share, the continued elevator problem loan and OREO work out expenses, the one time system conversion expenses, and the deferred tax write off.

However, these same items are not on the critical path of achieving our return on average tangible assets goal of 1% in 2017. We do believe that the adjusted profitability analysis is a good proxy for understanding our progress towards our 1% return on average tangible assets goal and are pleased with our planned progress in 2015. As usual, we will keep you updated quarterly as we progress. Tim, that concludes my comments.

Thank you, Brian, and thanks for covering so much ground there. Before closing, I will comment on our capital management actions. During the fourth quarter we repurchased another 991,000 shares, or 2.5% of the outstanding shares. As a reminder, since 2013 we have repurchased some 13.5 million shares, or 25.8% of shares outstanding, at a weighted average price of $19.70 and it's certainly reasonable to expect us to continue to opportunistically buy in shares, particularly given the current market conditions.

With respect to other capital actions, this morning, in fact, in conjunction with this call, we're announcing a small but meaningful acquisition here in the Colorado market; and while small, the economics are pretty attractive and it will improve our position in a market where we currently do business. We can certainly cover the deal in more detail during Q&A if there's any interest. With that, Johnna, would ask you to please open up the lines for Q&A.

(Operator Instructions)

Paul Miller, FBR Capital Markets.

Can you add a little more color to the deal you just announced at the same time the call. It looks like about 100 -- it's a small deal, is my guess, but is it -- does it bring any expertise?

Paul, this is Brian. It's a real nice clean community bank that fits into a market that we have been focused in La Plata, very attractive demographic market and full of business and small businesses. We currently just have a small presence there and this was an opportunity to take a meaningful position. Actually, it's the market share. Wells Fargo is largest we do well against those side companies.

From the economic standpoint, it is a tangible book value deal, which was really attractive and 100% cash. Is putting to use -- excuse me, $14 million of cash. We do have in the agreement a price adjuster for larger OREO properties that they have, but otherwise our due diligence in the credit portfolio really worked out well.

The two-year payback on tangible book value per share, just a $0.05 dilution. It gets earn back to very quickly. In the release you saw we expect to close it in the third quarter and operated as Pine River until the end of the year, where we would then converted to Community Banks of Colorado.

I would stress again, Paul, very small transaction, good economics and there's not a lot more to add.

Okay. Was there -- I didn't see the deal metrics. Was it roughly -- what multiple to book was and what multiple to earnings?

What I mentioned was, it's a book value deal. It's a tangible book value deal.

It was right at book value? What about earnings?

Right on top. It's coming off working to a number of credit problems, so it's been caring some higher costs and that's really one of the benefits that we will be able to realize those expense efficiency as we go forward, so it hasn't been a strong earner, but it's position and its locations and the cleanup that it has done we really like.

Paul, I would almost think of it is a branch transaction with some core, small and commercial banking access that we were real interested in.

I have not had time to go to over deal but it looks like -- is it just a one-branch shop?

No, it's got four banking centers.

It's got four banking centers?

In attractive counties, yes. Compliments us well.

I didn't -- you've got about, correct me if I'm wrong, about 8% exposure to energy. With energy prices where they are, it's been one of the big topics on every call out there. Can you add some color on your energy exposure?

Sure, Paul. This is Rick. Look, again, as a reminder our loan book is at 8% of loans, only 4% of earning assets. As I said during the comments portion, we have completed a review of each and every one of those clients. Really confirms the underwriting, the quality of these clients.

Just a couple other observations. Since December, and obviously leading up to December, each of these clients has taken actions to shore up liquidity. Some have engaged in capital raising. We certainly are talking with them about downside scenarios on price, assuming they continue to be depressed.

I would tell you as we move forward we'd expect balances from those existing clients to actually decrease as they look to delever even further in position again for a longer period of depressed prices. Given capital raises in the liquidity positions, an interesting ancillary benefit will be an increase in deposits and repurchase agreements.

Is most of the energy credits, are they in the Colorado area or they also in the Kansas City area?

Really not Kansas City. We have the limited presence in Texas so really between Texas and Colorado, and very diversified in terms of oil-fields and the position in the market, if that's helpful to you.

Guys, thank you very much.

Matt Olney, Stephens.

I was hoping to get some more color on the loan growth in the fourth quarter. The origination slowed down a little bit. I thought in previous years fourth quarter was usually pretty good for that CNI bucket. Was there anything unusual in the quarter as far as the CNI originations and what's the outlook within just that category?

Matt, this is Rick. Give you a couple of thoughts on that. Again. I think this was mentioned by both Brian and Tim, but really there is the ebb and flow in our business. It's certainly not linear. We didn't see anything unusual, there were just a number of factors. I will tell you the average funding per commitment was lower in the fourth quarter but wouldn't see that as an ongoing trend.

Matt, look, I would add that candidly I was somewhat disappointed with our production performance in the fourth quarter. We do come into the first quarter already early in the quarter looking like it's going to shape up to be a very nice start of the year for us.

Having said that, we've had a lot of discussions both with the Board and around this table and we're simply not going to sacrifice credit quality and we understand we have a hot borrowing credit quality for growth. As everybody on this call knows, a bank can generate all the loan volume they want if they are willing to take what we deem to be unacceptable risk. Look, I think we were a bit off our pace in the fourth and feel good about where we are at as we roll into the first of this year.

Okay, that's helpful. Going back to the energy discussion, I believe we just talked about how is a diversified portfolio. Can you add some more color on that in terms of what percent is production versus oil-field services versus other items?

Absolutely, Matt. Let me break it down for you. 60% in production and again, those have the proven reserves in the borrowing base protections that I think most folks are familiar with. 20% midstream, and those are marked by very well capitalized low leverage types of clients. And then finally 20% in services. We have all of those housed within our asset based group to really monitor on a daily basis. Maybe some additional color too, the average funded balance is only $70 million across to our portfolio. It's granular and very diversified, not just by sector, but by client.

Yes, that's helpful. As far as the change, or the anticipated change, at the core processing system, I was previously understood that you guys had rebuilt your own system over the last few years. Was that a misunderstanding on my part or is this just a change in philosophy?

Matt, the way to think about it is, is we did work with partners to develop our own operating systems. When I say our own, we were outsourcing them with partners. We continue with that strategy but we found ourselves in a unique position as we were reviewing the renewal with an existing major provider and found ourselves with strong interest in partnering with our Company in some unique dynamics in the market that really led to what felt like was a once-in-a-lifetime opportunity. We were able to do it with the structure that gives us incredible flexibility but also really reduces our core transaction operating costs. We can get into that in more detail if you would like, but that is at least how it shapes up strategically.

That's helpful. Thank you.

Tim O'Brien, Sandler O'Neill and Partners.

Following up, sticking with energy for a minute, you talked about the importance of working with clients that have lower leverage. You give a little more color on how you view limits on what you'll fund or what you'll lend on relative to leverage for these clients? Can you bifurcate it between the different kinds of businesses you work with on production services and midstream?

Sure, Tim, absolutely. This is Rick. Let's start with production. We really use a very conservative approach to how we approach the reserves and the overall capitalization of these companies. We'll run the base case using the lower of current or trailing prices, which gives us, again, a more conservative view when you're in a falling pacing environment.

Then we also look at a downside scenario. In our latest price deck, we have oil at $35 and gas at $2.23 and we apply additional effectively perimeter around a downside scenario. What that does is it creates a very strong position should oil prices continue to be low and average utilizations in that portfolio today are only 63%. Maybe that helps on the production. It's the very conservative approach both on a, call it, a reserves collateral basis as well as an overall capitalization of the company.

On the midstream, we typically look for very strong capital positions and leverage multiples well below anything that would approach definition of leverage finance. And then finally on the services companies, our objective is to be in the trading assets and really avoid long-term lending against assets that in a downside scenario become pressured in terms of cash flows. Again, we're looking for strong enough balance sheet in the services to really self liquidate as the trading assets contract.

Have you guys filed any other detail about the -- your energy business specifically? Is there some data out there about underwriting criteria that you follow?

We really haven't filed anything. We certainly have a very well documented and very thoughtful policy around all of our practices around energy, but that is internal.

Okay, great. A question for Brian. Brian, could you talk a little bit about the weighted yield on new originations this quarter and how much was variable?

Sure, Tim. We had 3.7% -- just a little over 3.7% was our new origination yield and that is consistent with the last quarter and consistent with the last handful of quarters in that range. We had a very strong 68% of that variable and again our strategy has been to grab that and that 68% is actually the high end of what we have had for the last handful of quarters.

As far as the overhead, as far as the core system change, did you give a dollar amount of incremental cost that you expected to hit in 4Q? I didn't catch that.

The guidance I gave you, Tim, was that we would expect in 2015 a total expense, because it happens throughout the year in some cases, of incremental of $3 million to $4 million with a lot of that hitting the fourth quarter. And then the $4 million to $5 million benefit will primarily kick in, in 2016 and beyond annually.

Thanks for revisiting that. Last question I have for you is, with regard to loss share contract exploration that you guys make note of, the first hitting in late 2015, is that a fourth-quarter event?

It is, Tim.

How much of the acquired covered book will be effected by the expiration of that contract? I'm assuming those are commercial loans?

There's a couple pieces to it, but just in simple terms, the Hillcrest acquisition is one that expires late this year. And Tim, we've been great about getting all of that worked out well in advance of getting anywhere near the end. That is not the one that is really moving us as much as the Community Banks of Colorado, which still has two years left on it.

So a lot of what we're seeing, the ebbs flows on a quarterly basis, is really Community Banks of Colorado stuff?

Yes, at this point now, right.

Okay. Thanks for answering my questions.

Tim, thanks as always for your good questions. I will add that you or any of our other callers would not be surprised that we are very interested in pursuing this apparent growing potential for an early exit with the FDIC.

So while we talk about the two remaining contracts and the termination dates, we would be in that camp that would be very interested for bringing early closure to those contracts if it made sense for our partners at the FDIC. Having said that, our greatest motivation is that, frankly, it would bring greater clarity to the actual earnings of the Company.

Have you seen a blueprint for success in achieving early resolution or disposition of those contracts and relationships?

As you probably know, as we closed out 2014 we started to see a little movement on the part of the FDIC but I would suggest it's premature to say that there's an established blueprint. It should be no surprise that we have strong interest in working with the professionals at the FDIC and determining if there something that can be done there.

That's good to know. Just one real quick last question. You characterized the bank you are acquiring as being commercial oriented in Colorado, did I hear that right?

We would describe it --

Is it the community bank?

We would describe as being a community bank. That is exactly right.

What is their non-interest-bearing deposit base as a percentage of total deposits? Sorry, I had to throw that at you, Brian.

I think that's -- you finally -- I can tell by the look on his face you finally got him.

I'm smiling, too.

It is 31%.

Nice. Great.

Gary Tenner, D.A. Davidson.

I just had a couple of questions. Wanted to make I sure a couple of things correctly. In terms of the tax rate outlook for 2015, Brian, did you say 30% including the impact of the DTA of the $1.9 million?

Yes, that is correct.

Okay. In terms of the FDIC amortization expense, that range you gave, I think $23 million to $33 million. So anything that, any amount below that (technical difficulty) that not get amortized, I guess effectively would get written off. Is that late -- is that in the fourth quarter or would that happen in actually in 2016?

Let me just clarify that the $23 million to $33 million that I gave you was an all in FDIC related. It's not just the amortization. There is a claw back liability we continue to add to as a covered asset performance --

Remind everybody but the claw back is.

It is just a part of the agreement that takes a portion of the good news that we estimated at the beginning of tying to be close to $40 million in total, and we are tracking very close to that. That becomes a settlement with the FDIC. We have a liability on the books today that is about $36 million and is accruing up on a present value basis. It hits through those accounts and also any sharing of gains and the sharing of our expenses go through that. That is the $23 million to $33 million, just to be clear there.

Then on the amortization, there isn't a cliff stopping point. With the accounting and, Tim, it frustrates all of us from an economic perspective, but it is the accounting. It gets -- every time we do a read it will get spread over the remaining loss share period. So there is no write down at a period of time. There is a stoppage, but we have $39 million that sits there as of the end of the year. That comes off the books as we build the FDIC for loss share or as we amortize that expense.

Brian if I could add here, to be clear, what Brian just said is really important that there is, again, two ways. One is the write offer for amortization. The other is through billing so we still expect to have billings to the FDIC. It is just that as we have gotten better and better results from these covered assets, the amount we expect to bill decreases.

Gary, your question is getting a lot of attention and responses here because it is, we think, really the biggest challenge to uncovering that path to that 1%-plus ROA. If there's additional point to be added here, I would share with you that we think the expected aggressive amortization of that receivable is going to make for a pretty tough year on a GAAP reported earnings basis.

You will all run your own models and come to your own conclusions but we really do expect the news to continue to be very good as it relates to those distressed loan portfolios we acquired and as a result, as we just discussed, we're going to see some real movement in that amortization of the receivable.

I guess just to make sure I'm looking at it right, then, if you get -- let's say you are at the high end of that range this year, than that doesn't necessarily mean that, that line item gets zeroed out in 2016 but it should be appreciatively lower.

That is right. Significantly lower.

Okay. Alright, thanks very much.

That is all the time we have for questions. I'll now turn the call back to Mr. Laney for his closing remarks.

Johnna, I am sensitive to that. Are there any other -- I know we were on a clock, but I hate to cut any of our analysts off if we --

Peyton Green, Sterne Agee.

I was wondering if you could comment on the M&A pipeline. Certainly good to see you'll get a good little community bank deal, but what is the activity look like and how would you characterize it where it was six months ago?

I would characterize that we have been very active in two fronts. One, we're always interested in the banking landscape and there just hasn't been a lot that has come out there, but we are happy with the little deal that we did and it certainly enhances our franchise.

We've also been active in the commercial finance space and I think I will share with you that we went deep into detail due diligence twice in the last four months. Backed away each time for number of reasons that you would be very pleased with, but we continue to see opportunities that can fit within what we are trying to do here and we will be selective in pursuing those. Hopeful that they will make sense, but very disciplined that not worth making mistakes for.

Okay, and then the follow up question. What is the level of capital. You all have significant excess capital but when do you maybe stop buying the stock back? Is there TC ratio of total risk base level?

At these levels in the market now, they are very attractive to buy back. It is a balance. As we've shared with you before, a couple hundred million dollars and you have got opportunities that you put use that will create new value and versus the buybacks. We like the optionality that we've had and the opportunities and the pace of which we are able to buy back.

Why don't you remind everyone where we are at in terms of tier 1 capital, excess capital.

I didn't calculate that. We are sitting at -- anything above 10% still, at this stage, would be considered excess capital. Although, and as we shared with you, that is because of an operating agreement that we still haven't placed and that operating agreement we expect over time to give us a little more room below that 10%. It's still a large number, it was [225] at the end of the third quarter.

That is 10% tier 1 leverage, just to make sure I've got the right number, correct?

That's correct. We are at about 15%-plus today.

That 10% leverage was required in an operating agreement in order to obtain the charter for the bank. We are well above that 10% requirement. Long story short, you are going to continue to see us be pretty aggressive in buybacks.

With the mindset, here's the longer-term mindset. As we talk about this target for hitting the 1% ROA, our goal is, as we arrive at that 1% or higher ROA, we're going to want to have our capital adjusted to an appropriate level that would allow us to generate the kind of returns on equity that our investors would expect.

We've said before, we feel like we have a lot of levers to pull to get to that, whether it's making acquisitions, and again, as evidenced by the small acquisition, their going to have to adhere to a very high standards, or acquiring our own shares and at current trading prices, we view that is the best acquisition we could make. Acquiring at or close to tangible book, we are effectively realizing no earn-back period, immediately accretive kind of actions and we will do that all day long.

Let's say we go to a scenario where we were on top of a 1%-plus ROA and still had excess capital. There's always the option to look at a one-time dividend, albeit we still tend to have a bias as investors to buy in shares when and where we can. It's another great question and that's how we think about capital management.

Peyton, let me give you that number. It's about $200 million at the end of the year that we would consider to be excess capital.

I was just making sure that it was still the 10% level. On the cash dividend, it would you anticipate bumping it, or as long as the reported earnings state somewhat depressed, will you keep it down there.

That is another one we've discussed quite a bit internally and we think it's appropriate to keep it where it's at, at this time.

Okay, great. Thank you for taking my questions.

Thanks for asking. Johnna, it sounds that must be it. I'll just wish everyone a very good day and thank you for tuning in for the call today.

This concludes today's conference call. If you would like to listen to the telephone replay of this call, it will be available beginning at approximately two hours and will run through February 13, 2015 by dialing (855) 859-2056 or (404) 537-3406 and referencing the conference ID of 40552925. The earnings release and an 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.