National Bank Holdings Corporation (NBHC) Q1 2014 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2013 First Quarter Earnings Call. My name is Mike, and I’ll 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 noninterest 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 is now my pleasure to turn the call over and introduce National Bank Holdings Corporation’s President and CEO, Mr. Tim Laney.

Thank you, Mike. Good day, and thank you for joining National Bank Holdings’ 2014 First 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 first quarter, we will share some thoughts on our outlook, and we’ll also take a deeper dive into the solid credit quality of our originated loan portfolio, as well as review the strong performance of the acquired nonstrategic portfolio. As you may have read, our year-over-year first quarter loan originations increased 98.4%, and we entered the second quarter with a new record high for our pipeline. As Rick will share with you in detail, the originated loan portfolio continues to perform very well on all fronts. During the quarter, we also grew low-cost transaction deposits and entered the second quarter with solid momentum on this front as well. We were not pleased with the decline during the quarter in banking-related noninterest income. As we have developed higher-quality depository relationships with our clients, we have seen a decline in our overdraft fee income, but the unusual issue during the quarter was a decline in debit card exchange income. I will share with you that our day count analysis here in April suggests solid improvement in that area. We also continue to make progress on the productivity front, having reduced operating expenses 3.6% from the prior quarter. With regard to capital management, we bought in another 1% of our outstanding shares during the quarter at a weighted average price of $19.35. These repurchases increased our cumulative repurchases to 15.1%. Given our strong belief that we are on a path to delivering a 1% return on the assets, we believe there are few better actions we can take for our long-term investors than buying in shares in a price range around tangible book. To that end, we will continue our repurchase program during the second quarter. With respect to acquisitions, we remain active, with a focus on privately held banks in our markets with assets in the $500 million to $5 billion range. Given where most publicly traded banks in our markets are currently trading, it'll be very difficult to construct an attractive acquisition with one of those banks. For that reason, our focus is on the privately held institutions. The good news is that 52 of the 65 banks with assets in our targeted range and operating in our core markets are private. We believe we have an attractive -- and we believe we are an attractive option to sellers who are looking for either a straight cash deal or a cash-stock transaction with an attractive but fair day 1 premium and, perhaps more important, the opportunity to realize what should be attractive stock price appreciation on the announcement of a well-constructed merger. This is our focus, and we will continue to work with interested potential partners. As I've said before, we remain very focused on building our company organically and opportunistically buying in our shares until we come to terms with the right partners I'll now turn the call over to our Chief Risk Management Officer, Rick Newfield. Rick?

Thank you, Tim. I will first cover our originated portfolio with respect to our first quarter fundings and then summarize our excellent credit quality. I’ll also discuss our continued success in reducing nonstrategic loans at a rapid pace while delivering outcomes better than our original marks. Our originated loan portfolio totaled $1.26 billion at March 31, 2014, an increase of 60.5% over December 31, 2013, an annualized growth rate of 66%. We delivered these impressive results while remaining disciplined in our underwriting and credit structuring. Furthermore, we continue to build our loan portfolio with a granular mix of consumer and commercial loan types. Credit quality remains excellent, as nonaccruals were at just 9 basis points of the originated loan book. As Tim said, our first quarter fundings of $217 million representing 98% increase over first quarter 2013. Commercial originations of $186 million were granular, maintaining trends from 2013, with average fundings of $980,000. 84% of these originations were commercial industrial, owner-occupied real estate and agricultural loans. In addition to our disciplined approach to underwriting individual loans, we have in place industry sector and credit type limits to ensure that our loan portfolio remains diversified. For example, no individual commercial industry sector can have a greater concentration than 15% of our total loan commitments, and less favored industry sectors are 5% or less. Consumer loans originations of $31 million were primarily composed of high-quality residential mortgage loans. We are seeing a 50:50 mix of purchase and refinance purposes. Nevertheless, our first quarter originations had an average loan-to-value of 65%. We continue to underwrite to prudent standards, with average FICO scores of 763. During the first quarter, we began to ramp up small business calling and corresponding loan origination through our banking centers. We expect this activity to increase through the year and deliver meaningful contributions to both loan growth and growth in low-cost deposits. I am very pleased with the performance of our total non-310-30 loans, which totaled $1.56 billion at March 31, 2014. Net charge-offs were just $315,000 or 9 basis points annualized. 90-day past dues remained immaterial at less than 1 basis point. Nonperforming loans totaled 2.08%, but it is important to note that 70% of these nonperforming loans are accruing restructure loans. Nonaccrual loans actually improved by 5 basis points from December 31, 2013 to 0.63% of loans as of March 31, 2014. Given our disciplined approach to underwriting and monitoring of our consumer commercial portfolios, we remain confident in our excellent credit quality. During the first quarter, we had continued success in reducing our nonstrategic loans while delivering improved economic outcomes. As a reminder, these 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. Nonstrategic loans were reduced from $350 million at December 31, 2013 to $321 million at March 31, 2014, a 33% annualized rate. I'm particularly pleased with the efforts of our special assets team in positioning our remaining OREO and problem loans for successful and expedient resolution. Just over 1.5 years ago, we identified the most troubling loans and OREO properties, typically in land and land development, totaling $400 million. Today, that balance is under $100 million, and we have strong prospects for continuing progress in resolving this subset of our problem loan and OREO properties. Our 310-30 loan pools are composed entirely of loans acquired through our 3 failed bank purchases. A quarterly remeasurement of the expected cash flows from these loans resulted in $5.6 million in accreditable [ph] yield pickup. It’s important to note that these loan pools had original book balances of $1.654 billion. As of March 31, 2014, these balances had been reduced 75% to $406 million. And the cumulative, life-to-date accreditable [ph] yield pickup is $173 million against impairments of only $25 million, resulting in a net economic gain of $148 million. This reflects our conservative day 1 acquisition marks and the excellent results of our problem loan workout efforts. To summarize, we’re delivering 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 original credit marks. I will now turn the call over to Brian Lilly, Chief Financial Officer.

Thank you, Rick, and good morning, everyone. I will share some additional thoughts on the quarter, as well as provide an update on our guidance for 2014. Before going too far, I should point out that inherent within our 2014 guidance are economic assumptions consistent with the current outlook of leading economists, which includes generally stable short-term interest rates and slightly improving business and consumer outlooks. As Tim and Rick have shared, we’re pleased with the first quarter results. As we continue to add to our organic growth, manage nonstrategic assets for increasing returns, continue excellent credit quality and manage expenses lower, we're moving the financial levers in a positive direction. Of particular importance is that we achieved a key objective this quarter by stabilizing net interest income, which is an important progression point in the development of our company. The increasing income from loan originations is offsetting the decrease in income from higher-yielding purchased loan. Recall that this was part of our guidance last quarter. Given the stability of the net interest income representing 85% of our revenue stream, the large negative impacts from the FDIC accounting and problem asset costs jumped off the page. One analysis that we use to evaluate the progress of our building efforts is -- 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 sharing income and the large expense related to OREO and problem loan workouts, which can be seen in our non-GAAP reconciliation on Page 16 of the earnings release. These items negatively impacted the first quarter by a net $0.12 per share. Driven by the expiration of the FDIC loss sharing agreements over the next few years and the decreasing problem asset workout expenses, the $0.12 per share negative impact will fluctuate on a quarterly basis but will generally decrease over time. The $0.12 has a 0.45% negative impact on our reported return on tangible assets of 0.19%. The adjusted $0.15 per share and 0.64% return on tangible assets provides better clarity to our progress towards reaching our goal of 1% return on tangible assets. As Tim and Rick mentioned, we are very pleased with the progress that we've made growing the loan portfolio. For the third consecutive quarter, we grew total loans. Our strong originations more than offset the decreases in nonstrategic loans, resulting in total loan growth of $107.5 million or 23.5% annualized. The originated loan portfolio continues to make up a larger component 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 4.1%, while 62% were variable rate, supporting our asset-sensitive position. Our pipelines are strong, and we reiterate our goal of 1 billion in 2014 originations, with a bias towards beating that goal. In terms of deposits, we completed the exit of the previously announced California and retirement banking centers. Adjusting for these exits, we had very solid linked quarter growth in average transaction deposits of 7.5% annualized. And average total deposits came very close to the inflection point, decreasing just $5.6 million from the fourth quarter. Consistent with our prior guidance, we expect some continued runoff in time deposits before beginning to stabilize and growing total deposits in the back half of 2014. Net interest income totaled 43.3 million in the first quarter and, accounting for the 2-days difference from the fourth quarter, reached a the key inflection point that we discussed earlier. We are very pleased with the start to 2014 and reiterate our guidance of a slightly increasing quarterly net interest income as we continue to remix the earning assets and build a valuable recurring income stream from our organic growth. Rick addressed the credit quality, and I would only add that we expect the credit quality to remain strong in 2014 and that the level of provision for loan losses will continue to support growth loan. We have planned non-310-30 net charge-offs to be in the range of 10 to 15 basis points, with the allowance for loan losses increasing slightly as a percentage of loans as the purchase loans decrease. Turning to noninterest income. The quarter totaled an unusual-looking negative $354,000. The net negative impacts from the FDIC related, OREO income and recovery of prior charge-offs more than offset the total of the more traditional banking fees. These more traditional banking-related fees totaled $6.9 million and decreased on a linked quarter basis, primarily due to seasonality plus lower gains on the of sales of mortgages from lower industry refinance volumes. And we did have lower debit card transactions to start the quarter, given the well-publicized Target security breach. But activity has picked up later in the quarter, as Tim mentioned. The FDIC loss share related income accounts totaled a negative $8.6 million. The FDIC indemnification asset amortization expense was $7.6 million and was higher than our prior quarterly guidance due to the favorable ASC 310-30 remeasurement results in the first quarter, as the client cash flow projections increased. Recall that most of the covered assets are accounted for in the ASC 310-30 loan pools. As a result of the first quarter remeasurement, the quarterly FDIC indemnification asset amortization expense is expected to be $5.6 million in the second quarter, $3.2 million in the third and $2.2 million in the fourth. 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 $957,000 as we accounted for the sharing of gains on covered assets, incurred lower loss share expenses and increased the FDIC clawback liability for the better cash flow projections on the covered assets. To my comments earlier regarding the negative impacts, within noninterest income, the line items of FDIC indemnification asset amortization, FDIC loss share income, OREO income and gains on previously charged-off acquired loans net to a negative $7.3 million or negative $0.099 per share. Total expenses were $39 million and included operating expenses of $37.6 million, OREO and problem loan expenses of $2.3 million and $0.9 million benefit from a decrease in the warrant liability. As we previously guided, we expected a decrease in the expenses from the fourth quarter as we realized the benefits of cost initiatives and the closing of the banking centers. However, we benefited additionally from the timing of certain expenses, such as marketing expense, that is expected to be higher in subsequent quarters. In addition, our annual compensation actions occur in the second quarter. Therefore, we look for second quarter operating expenses to be higher, in the range of our prior guidance of $38 million to $39 million. We’ve also made significant progress managing down the problem loan and OREO workout expenses. These expenses totaled $2.3 million, decreasing $2.2 million from the last quarter, and were consistent with our plan. As you know, these expenses are lumpy but we are reaffirming our prior guidance of approximately $10 million in total for the full year 2014. In the adjusted earnings per share that I discussed earlier, the negative impact from the OREO and problem loan expenses was $0.032 per share. The adjusted efficiency ratio of 72% is noteworthy, as it speaks to the additional potential as we work to lower the ratio to our goal of below 60%. The actual tax rate of 35% was better than the 39% guidance that we provided last quarter. The quarter benefited from the non-taxable nature of the change in the warrant liability, and we are beginning to see an impact from the increased tax-exempt lending in our government banking group. Going forward, as we increase taxable income, the tax rate will be closer to 39%, plus or minus a few percentage points on a quarterly basis. Capital ratios remained strong. Tangible book value per share ended the quarter at $18.44, increasing $0.17 from the end of the fourth quarter as the available-for-sale fair value marks moved to basically a neutral position. Under the $50 million share repurchase authorization, we did purchase 455,000 shares during the first quarter. The average price per share was $19.35. This brings our total repurchases to $155.5 million, representing 7.9 million shares or 15.1% of our outstanding shares. The total weighted average price was an attractive $19.75 per share. We do view this as an opportunistic use of excess capital, as we expect our valuations to increase as we continue to execute on our strategic priorities. The share repurchases that we completed can also be used to offset any shares that we may issue in connection with an acquisition. Tim, that concludes my comments.

Thanks, Brian. Well, as you have heard, we believe we are well on our way to achieving our goal of producing a 1% return on tangible assets. We also believe we have multiple options for achieving an attractive return on equity, including, of course M&A, stock repurchases and/or dividends. But I can't stress enough that these options only work when we deliver solid organic growth, and we believe we’re doing just that. Mike, on that point, we are ready to open up the line for questions.

[Operator Instructions] Your first question is from Paul Miller with FBR Capital Markets.

Can you talk a little bit about the loan growth in the various portfolio?

Paul, this is Rick Newfield. So as I indicated with the origination volume, most of our growth in the first quarter came from a mix of C&I, owner-occupied real estate, agriculture and non-owner-occupied commercial real estate. The greatest growth rate was in fact in commercial, followed by CRE and owner-occupied CRE. Consumer was relatively stable as originations, as I said, were $31 million. And we had normal amortizations in the portfolio.

And then in your two cities, where you’re making your footprint, are you seeing increased demand for loans? Because I know a lot of banks, I guess, in certain -- especially in the energy states are seeing -- they are talking very positive about future loan growth in the next couple quarters. Are you seeing the same thing?

Paul, we are -- I would describe it this way. We are incredibly fortunate to be operating in the state of Colorado. This state is performing well across all sectors, and the good news is it’s well-diversified growth. It's not necessarily all energy-related. We just see a very strong business climate, a strong entrepreneurial spirit and just -- it’s a perfect market for an institution focused on small and medium-sized businesses. I would say that when you think about Kansas City, Overland Park, it's never going to be -- I shouldn't say never, but today, it's certainly not a grand slam kind of hitter. It’s not going to knock it out of the park. But very solid singles and doubles, very, very good business. And I would say, while it may not be the Babe Ruth, it's never going to lose the game for us either. And then, interestingly enough, we do have a small presence in Dallas and Austin, Texas. And once again, while I think we generally, when we -- a lot of us think about Texas, we think energy. But while we don't see ourselves acquiring anything in Texas, we will continue to support the build-out of the teams there organically because they're just very strong business climates. And so, across the board, we benefit from a rising tide. We’re in good markets. And as much as we would just like to say it's about us being good, we certainly benefit from strong markets.

And then on the capital management, I don’t know if you’ve addressed this in the past, but have you ever considered a dividend, or is that too early for that?

It's a great question. We certainly considered it. But our conviction still is that there will be opportunities around M&A. We’re not exactly sitting on our hands until that happens. We also believe that, for the long-term investor, there's a much more attractive option to a special dividend, and that is buying in our own shares at attractive prices. And we will continue to do that, and should we ever get to a point where we just -- we declare that M&A, given pricing issues, were out of the question, there is a point where a special dividend would make sense. I think it's a very fair and good question.

Your next question comes from Chris McGratty with KBW.

Brian, just to make sure I heard the expenses, $38 million to $39 million next quarter, that excludes kind of the couple of million dollars of low-cap cost [ph]. Is that right? Did I hear you right?

Yes. The operating cost of $38 million to $39 million, and then the other guidance was that $10 million for the problem loan and OREO cost for the year. Those are separate, mutually exclusive.

Tim, on the change in M&A strategy, you talked about the size $500 million to $5 billion. That, to me, suggests you guys may be willing to do an MOE. But I'm more interested in just kind of the comments about the privately held institution. Maybe I am not thinking about it the right way, but how does looking at privately held institutions affect the valuation that you ultimately pay? I understand the public versus -- public currency, but won't those shareholders of a privately held banks want, presumably, a decent premium to book value if they're healthy?

Yes, I mean, the key is a decent. And I also think there is a liquidity discount between a publicly traded and a private company. And what we found in the work that we’re doing is that the privately held institutions have more flexibility to think about pricing and the long-term impact versus the day 1 premium they deliver.

Now given this new comment about privately held, does that suggest that you may be closer to something? Or is this kind of everything's on the table for the next year or 2?

I can’t comment.

I guess maybe I'll ask one more question, then I'll jump back out. It's been 1.5 years since the IPO. How are you thinking about the timing if it doesn't work? I know you talked about a special dividend and you couldn’t find the deal, what about other -- flipping the switch on M&A and kind of partnering with somebody else that's a little bit larger? How are you guys thinking about that?

Look, we are going to remain very focused on building an attractive bank. We think we’re just doing that. And ultimately, our personal interests are very aligned with all other investors, and we’re going to be focused on doing what is right for our investors.

Your next question comes from Matt Olney with Stephens.

Looks like there were some positive trends in the net interest margin. Can you talk more about your outlook on the margin?

Matt, as you can imagine, we first focused on net interest income. And the guidance I provided on that was purposeful, that kind of that level to slightly increasing from here. But in that remixing strategy that I began sharing with you in January and again today, we are moving earning asset concentrations. And what happened in the first quarter from -- that resulted in the 16 basis points widening of the margin is we reduced the 25 basis point earner in the interest-bearing deposits with banks, short-term investments. And so you saw that impact there where the underlying net interest income was relatively flat. So given that flatness and the runoff of the higher-yielding of purchased assets, we’re going to see that margin contract just a little bit, marginally, if you will, as you go forward. But the net interest income is really where we’re focused and to building that return on tangible assets. Hopefully, that helps you a little bit. Let me just add that the cash part, we have a plan for that cash part to come down a little bit, also, as we go forward.

The next question is from Tim O’Brien with Sandler O’Neill. Tim O’Brien: Just one bit of feedback comment. Tim, thanks for the color on M&A strategy. The update was clear and helpful, so appreciate that. And then, so regarding originations, can you -- and this is kind of piggybacking on what Paul was talking about. Do you have originations by Colorado versus Kansas City MSA you could break out for me? Total originations, not on a segment basis.

Tim, we certainly have that information, but it's certainly not something that we have shared -- no, no, we shared it in the past. It is very, very much aligned with where our resources are aligned.

Tim, this is Rick. I don't have all of the breakdowns by industry sector and so on, but I can tell you that, for commercial banking, and this may help also address Paul’s question, we actually had roughly twice the originations at Bank Midwest that we had in Colorado in the first quarter in commercial. And then on consumer, relatively even. So there is obviously some timing there, and I wouldn’t, to Tim’s point earlier, suggest that’s a trend. But I also think it speaks to the fact that all our divisions are performing. Tim O’Brien: Just kind of overall, what was it, $216 million in originations was -- can you characterize, were they more weighted towards Colorado or Kansas City just overall?

We had -- again, Tim, I would repeat that we had a good balance. We have more resources with our specialty groups headquartered here in Colorado, but they are lending across the markets. So you are asking an interesting question, but there is a real balance, and that’s kind of what we shared in the prior quarter. There isn’t an overweighting in Colorado versus Kansas City versus Texas when you consider where we have invested. Tim O’Brien: Partially, it's just indicative on what's going on in the local economies, too. It gives us a sense of that, but that’s part of the reason I asked that question.

It’s a fair question. Here's another -- one thing that you’ve all heard us say very consistently is we targeted, we made an overinvestment in commercial bankers. We worked to operate with approximately 58 commercial bankers. And today, it's fair to say that those bankers are reasonably balanced between our markets of Bank Midwest in Missouri and Community Banks of Colorado in Colorado, and then we have bankers in Dallas and Austin as well. And then, as we continue to look at the deployment of those resources, we have the flexibility to move bankers to adjust that 58 set -- not to increase the 58, but to redeploy those bankers into the markets where we see the most growth potential. So it’s somewhat fluid, but today, we feel very good about all of our markets. Tim O’Brien: And then my next question is, can you -- do you have handy what the largest loan was that you originated this quarter, how big that was?

Sure, Tim. This is Rick. We actually had 1 loan about $12 million for the quarter. That was a $25 million loan of very high quality investment grade.

Explain just how high-quality it is.

This actually is a pool of rental single-family homes across broad geography, very well structured. So...

And then the next size loan down would be what?

$12 million.

In terms of total exposure?

Total exposure, total commitment. Tim O’Brien: So #1 was $25 million and #2 was $12 million?

Right. Tim O’Brien: So 2 largest, great. And they were both pools, or what were -- -- was one a...

When you get below that 1 single loan, really, we get a broad mix of loans between $1 million and $10 million, again, with a handful being between $10 million and $15 million -- or $10 million and $12 million. And I wouldn’t point out any particular industry sector or concentration. Very diversified.

I mean, when you think about one at $25 million, and then we tell you that our average is under $1 million, it should tell you that there is -- we have a lot of small dollar relationships as well, but we are fine with that. We like the small and midsized business. The $25 million is an anomaly. Tim O’Brien: And then last question, to Brian, and a little comment. As far as the FDIC accounting and the impact on the business, that was pretty helpful. That $0.12 number that you talk about, kind of key on this quarter. And you talk about, over time, that being volatile but moving toward 0. Is there a window, a time window out there at some point in the future where either it hits 0 with all certainty or it’s going to be within a few months or 0.5 years or something that it reaches 0 that you know definitively? And if so, do you know when that period -- when that event occurs?

Let me talk about it. Nothing is ever certain, certain, except for, certainly, some government work. But let me give you some thoughts on that because we do think about it that way, and that's why we outlined it for you. The items that I identified that we, just in our internal analysis, have a life to them. And when you think about some of the larger items, then, in the noninterest income section, where the net result was a $0.099 cents impact to the quarter, those are all directly tied to the those FDIC loss sharing agreements, and there is a definitive life to that. Now there is a maturity that happens in -- the first one would be towards in the fourth quarter of '15 and in the fourth quarter of '16. And then there is a little bit of a tail for recapture, clawback kind of things. But the big numbers are going to move through here in '14 and '15, as we modeled out, and they do just go away, and the underlying earnings show themselves. That's why we do that analysis. Now as you get to the expense side, the OREO and problem loan, probably a good benchmark is we've been moving the OREO number down from $90 million to $80 million at the end of the year to mid-60s now. Our plans are to continue to work those out. You can track, in the non-310-30, kind of the nonstrategic portfolio, those decreases. Those will be in lockstep with those expenses of problem loan and OREO expenses going away, and we’re moving those just as quickly as practical. So there will be a life to those that we see getting to normalized levels. And that also is $0.032 cents, and that, then, uncovers underneath the strength of the organic earnings that we’re throwing out there.

Brian, that was a great explanation. And just maybe to -- and you talked about it, but to put a little more color around something as specific is the FDIC receivable. Remind everybody what that balance is today. And then, we've given the numbers, but just if you think about how much we’re reducing that receivable, which is -- by the way, the amortization of that receivable, as everybody knows is a noncash expense, but it's literally like having an extra 20 pounds in your pack as you're climbing the mountain, and it’s going away pretty quickly. And by the way, it's going away because the purchased loan portfolio from the failed banks is performing much better than expected.

Yes. Well, as we’ve shared in the earnings release, we have $56.7 million receivable on the books at the end of the first quarter. And that’s certainly down from the mid-60s that we had in the end of the year. And of that, we currently estimate that $42 million is to be billed to the FDIC over time, with the net amount of that $14 million being amortized through this negative amortization that Tim was just talking about. And $11 million of that is the guidance I gave for the remainder of 2014, with the difference accruing later. Now as we go forward, and what has happened on a consistent basis, is that we re-estimate the cash flow receivables from those clients. And, as I said, about 60% of the 310-30 portfolio is FDIC-covered assets. And so when we estimate increased cash flows from those clients, it does reduce the amount we expect to bill to the FDIC, and it pushes more negative amortization. The good news to all of that is it’s not on the critical path to getting to our 1%, it’s just the time that it takes and the quarterly impacts that will give us.

And your next question comes from Gary Tenner with D.A. Davidson.

Just a couple of follow-up questions, one on asset quality. Just curious about the increase in the restructured loans on non-covered portfolio from year end until now. Was it one large loan, was it a bunch of small ones?

Gary, this is Rick. Look, not one loan. A number of residential loans during the normal course of business and some commercial loans, in all cases, these are accruing performing -- or accruing loans that we expect to fully perform. But once you do a prudent renewal restructure, we do include them in the non-performers. I would consider that not to be a trend or necessarily to be a long-term concern at all.

And then, I apologize, I did get on the call late. Tim, I caught the very tail end of your comments where you were talking about private banks. And I guess I missed where you launched that -- not to belabor the call, but what was -- is there change in the kind of banks or opportunities you're looking at? And is that why you made the point of talking about those private banks?

Well, for anyone else that may come in a bit later, to be clear, when we were talking about private banks, privately held banks versus publicly traded. And we've just found that, in discussions with potential partners, there is more flexibility in working with those institutions on day 1 premium and a view toward longer-term returns and partnering with an institution that has very nice runway. Understandably, with a publicly traded institution, a lot of pressure on what that day 1 premium is, which is certainly important but may be somewhat shortsighted. Our belief is that a key for both buyer and seller is participating in an arrangement that creates a reasonable and attractive payback period for the dilution of tangible book and inputs the combined companies in a position to realize very solid financial terms.

I am showing we have no further questions at this time. I will now turn the call back over to you Mr. Laney for his closing remarks.

Well, thank you, Mike. And more important, I want thank those that asked questions this morning. And certainly, to everyone that participated in the call, if you didn't get a chance to ask a question or one occurs later, certainly, don't hesitate to follow up. Thank you, 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 2 hours and will run through May 9, 2014, by dialing (855) 859-2056 or (404) 537-3406 and referencing the conference ID of 19737283. 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.