Tim Laney - Chairman, President and CEO Brian Lilly - Chief Financial Officer Rick Newfield - Chief Risk Management Officer.

Paul Miller - FBR Capital Markets Matt Olney - Stephens Tim O'Brien - Sandler O'Neill & Partners Gary Tenner - D.A. Davidson Peyton Green - Sterne Agee.

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

As a reminder, this conference is being recorded for replay purposes. I would like to remind you that this conference call will contain forward-looking statements, including statements regarding the company's loans and loan growth, deposits, strategic capital, potential income streams, gross margin, taxes and non-interest expense.

Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties, and other factors which are disclosed in more detail in the company's most recent filings with the U.S. Securities and Exchange Commission.

These statements speak only as of the date of this call and National Bank Holdings Corporation undertakes no obligation to update or revise these statements. It 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, Joanna. 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, 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% 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 remained very focus on building and maintaining the diverse and conservatively underwritten loan portfolio, with excellent credit quality and there is probably no better evidence than of this than the fact that we experienced only 6 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 are 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 aside, 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 continue to grow our low costs 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 remained sharply focused on expense management and Brian is going to be sharing some details with you around the strategic action that we've taken that will not only enhance our product and service offerings, but also meaningfully reduce our operating expenses as we look ahead.

Now on that point, I will stop and at least for now, and ask Rick to take a deeper dive into the performance of our loan portfolios.

Rick?.

Great. Thank you, Tim, and good morning. First, I will provide a summary of loan origination activity for 2014. Second, I will 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 and reducing non-strategic loans.

Summarize those efforts for 2014 and the continuing positive economic benefits generated through those efforts. Our originated loan portfolio totaled $1.6 million at December 31, 2014, an increase of $46.1 million or 11.4% annual 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 and our underwriting in 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 FICO of 763.

Turning to credit quality, I am pleased with the performance of our non-310-30 loans, which totaled $1.09 billion at December 31st. Net charge-offs in this portfolio, as Tim said, were just 6 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-accruals.

Overall, our credit quality remained steady and strong, with adversely rated loans continuing to decreasing in both absolute terms and as a percent of our total loans. Now with our presence in Colorado and our limited presence in Taxes, one might have questions on Energy sector.

Because of our continued commitment to build and maintain a well-diversified loan 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 approach the Energy sector recognizing the price volatility is a part of the industry. We have built our energy banking team with experienced energy bankers, experienced energy credit underwriters, including a petroleum geologist.

Our loan structures have protections against oil and gas prices risk, using downside scenarios in our borrowing basis and asset-based lending structures for clients in the services sub-sector. As part of our ongoing portfolio management practices, we have completed an extensive review of all Energy clients within the last 30 days.

We looked at further stress on price, hedging programs in placed, client liquidity and their balance sheet strength. Our analysis gives me confidence and the quality of the portfolio we built and the ability of our client’s demands effectively through protracted trough in oil prices.

As we turn the calendar to 2015, I’ll 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 78% annualized rate. As Tim said, we entered the quarter with $202 million of 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 impact 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 remeasurement of the expected cash flows from these loans resulted in $14.6 million in accretable yield pickup. Cumulatively, life-to-date 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 our loan portfolio with outstanding credit quality and we will not sacrifice our standards for short-term loan growth. With that, I will 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 continue 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 details 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 the 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 its adjusted basis, we have realized record quarterly adjusted profitability of $0.19 per share and generated 71 basis points return on average tangible assets.

The $0.02 increase over the third quarter was primarily 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 $8.8 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 very strong $457 million or 30%.

Total loans outstanding ended the quarter basically flat with the third quarter due to higher level of payouts and paydowns as well as an excellent progress exiting the non-strategic loans. We see this activity as the normal ebbs and 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 large 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 is recorded in the non-interest income accounts.

Additionally, we did increase the indemnification asset amortization of $0.8 million from our prior guidance due to better covered asset performance. Operating expenses delivered within our prior guidance of $38 million and was consistent with our third quarter. However, total expenses showed a significant decrease of $4.8 million.

The primary driver was $10.4 million OREO gains netted against OREO expenses and was partially offset by $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 cost will benefit 2016 and beyond. So that completes my comment 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 economist 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 thought 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 purchase loans with the expense management and banking fee growth while maintaining an excellent credit quality.

We project that a significant amount of the earning asset remixing, an 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 for line items driving the adjusted profitability results before continuing with guidance on FDIC loss share related, OREO and problem loan cost, the impact of the one-time cost of conversion, tax expense and the 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 are focused on building a relationship, client base that is granular in nature with small and midsize businesses and consumers.

We have credit guidelines limiting concentrations across industries, the conservative house limit and generally have not found the Shared National Credit in large investment real estate segments attractive.

We realized 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 the lower risk profile over time.

We expect total loans to grow in the range of 15% to 25% for the year and will be influenced by any unusual pace of nonstrategic and strategic loan payoffs and paydowns, as well as the level of originations. As you know, credit quality has been excellent and we projected continued strong performance.

The provision for loan loss expense guidance would be based on supportive loan growth and continuing loan 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 nonstrategic loan portfolio. In terms of deposits and client repurchase agreements, we see transaction deposits growing in a mid-single digits led by growth in demand deposit balances.

Given our lack of incremental funding needs, we see time deposits shrinking so that 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 purchase 310-30 loans pay down.

We are projecting quarterly net interest income in the range of $39 million to $41 million. We are also projecting the net interest margin in the range of 3.65% to 3.75% with the slightly decline in trend during the year owning to decrease in 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 digits 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 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.

Well that completes the build out of our assumptions for the 2015 adjusted profitability analysis and delivers earnings per share and return on average tangible assets that we believe provides a good launch in to 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 core conversion costs and taxes.

In 2014, as captured within the noninterest income section of our income statement, we incurred a net expense of [$36] [ph] million related to the FDIC loss share agreements.

This amount included $27.7 million of FDIC indemnification asset amortization expense, a $3.9 million clawback liability expense and a net expense of $5 million related to the sharing of workout expenses and gains on OREO. For 2015, we are projecting a net expense range of $23 million to $33 million with a bias towards 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 asset performance and the ever decreasing time to the end of a loss share agreements.

Recall that 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 noninterest 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 are changing our core operating system late in 2015 and we 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 of 2015.

Just to be clear, the total expense guidance for the year including the operating expenses, the OREO and problem loan related, and the cost of the systems conversions would be in the range of $155 million to $165 million.

This total is slightly higher than 2014 as we are not expecting a reoccurrence of either the $13 million in total OREO gains or a $3 million benefit from the 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 the $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 related to the expiration of the prior stock awards of executives no longer with the company. Now 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. So that completes the detailed guidance picture for you.

We have gone through 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.

We expect the decrease year-over-year is driven by a combined estimated negative impact of $0.53 and $0.74 per share from the large net expense related to the FDIC loss share, the continued elevated problem loan and OREO workout 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 a 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% of return on average tangible assets goal and I’m 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 are 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 the market where we currently do business and we can certainly cover the deal in more detail during Q&A if there is any interest.

With that, Joanna, we’d ask you to please open up the lines for Q&A..

[Operator Instructions] Your first question comes from the line of Paul Miller with FBR Capital Markets. Your line is open..

Yeah. Thanks a lot, guys. Can you just add a little bit more color to the deal you just announced at the same time in the call? It looks like about a 100 -- it's a small deal is my guess.

But does it bring any expertise?.

Hey. Paul, this is Brian. It’s a real nice clean community bank that fits into a market that we have been focused on in La Plata, very attractive demographic market and full of businesses, small businesses. We currently just have the small presence there and this is an opportunity to take a meaningful position and actually it’s the market share.

Wells Fargo is the largest. We do well against those type of companies..

Talk about the economics?.

From the economic standpoint, it’s a tangible book value deal, which was really attractive and 100% cash. It’s putting to use $14 million of cash. We do have any agreement of 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 was just a $0.05 dilution. It gets earned back very quickly. And in the release you saw, we expect to close it in the third quarter and operating is fine. We wait until the end of the year where we’ll then converted to community banks of Colorado..

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

Okay. I mean, I didn’t see the deal metrics.

Was it roughly -- what multiple to book was and what multiple to earnings?.

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

It was right at book value.

What about earnings?.

Right on top. Well, it’s coming off working through a number of better problems. So it’s been carrying some higher costs and that’s really one of the benefits that we’ll be able to realize those expense efficiencies as we go forward. So it’s hasn’t been a strong earner but its position in its locations and the clean-up that it’s done, we really liked..

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

Yeah. I mean, I haven’t had the time to go with the deal, but looks like it’s just a one branch shop..

No, it’s got four banking centers..

You have four banking centers?.

Yeah, in attractive counties, yeah..

Okay..

It compliments us well..

And then the -- and then I didn’t hear you -- I mean, question for -- about 8% exposure to energy, with energy prices where they are, it’s been one of the big topics and then we call out there? He had some color on your energy exposure..

Yeah. Sure, Paul. This is Rick. Look, again, as a reminder, our loan book is at 8% of loans, only 4% of earning assets. And as I said during the comments portion, we’ve completed the 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 would expect balances from those existing clients actually to decrease, as they look to delever even further and position again for a longer period of depressed prices, giving capital raises in the liquidity positions. An interesting ancillary benefit will be an increase in deposits and repurchase agreements..

And is most of the energy credits, are they in the Colorado here or they also in the Kansas City area?.

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

Okay. Guys, thank you very much..

Yeah. Thank you, Paul..

Yeah..

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

Hi. Thanks. Good morning, guys..

Hey..

Good morning, Matt..

Hey. I was hoping you can give some color on the loan growth in the fourth quarter. The origination slow down little bit. I thought in previous years, the fourth quarter was usually a pretty good for that C&I bucket.

Was there anything unusual in the quarter as far as the C&I originations and what’s the outlook within just that category?.

Hey. Matt, this is Rick. I will give you a couple 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 and 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 won’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.

But having said that we’ve had a lot of discussions, both with the Board and around this table and we are simply not going to sacrifice credit quality and we understand we have a high bar on credit quality for growth as everybody on this call knows.

Our bank can generate all the loan volume they want, if they are willing to take what we deem to be unacceptable risk. So 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.

And then going back to the energy discussion, I believe we just talked about how a diversified portfolio, can you add some more color on that in terms of what percent production versus -- other services versus other items?.

Absolutely, Matt. So let me break it down for you, 60% in production and again those half, the proven reserves and 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, and 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 $7 million across our portfolio, it’s granular and very diversified not just by sector but by client..

Yeah. That’s helpful. And then as far as the change or the anticipated change at the core processing system, I was previously understood that you guys had kind of 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 of that 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 and some unique dynamics in the market that really led to what felt like it was a once in a lifetime kind of opportunity.

And we were able to do it with the structure that gives us incredible flexibility, but also really reduces our core transaction operating cost. And we can get into that more detail if you would like, but that’s at least how it shapes up strategically..

Yeah. That’s helpful. Okay. That’s all I have, guys. Thank you..

Thanks, Matt..

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

Good morning, guys..

Good morning, Tim..

Good morning, Tim.

A following up, sticking with energy for a minute. You talked the importance of working with clients that have lower leverage.

Can you give a little more color on kind of how you view limits on what you’ll fund or what you’ll lend on relative to leverage for these clients? And can you bifurcate it between the different kinds of businesses you work with on production, services and midstream?.

Sure, Tim, absolutely. This is Rick. We’ll start with production and we really use a very conservative approach to how we approach the reserves and the overall capitalization of these companies.

So we’ll run the base case using the lower of current or trailing prices which gives us again a more conservative view when you are in a falling pricing environment. And 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 parameter around the 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%, so may be that helps on the production. That’s a very conservative approach both on a call it reserves collateral basis as well as an overall capitalization of the company.

On midstream, we typically look for very strong capital positions and leverage multiples well below anything that would approach a definition of leverage finance.

And then finally, on the services companies, our objective is to be in the trading assets to really avoid long-term lending against assets that in a downside scenario become pressured in terms of cash flows. So again, we are looking for a 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 or is there some data out there about underwriting criteria that you follow?.

We really haven’t any filed anything, we certainly have a very well-documented and very thoughtful policy around all of our practices around energy, but that’s internal..

Okay. Great. And then 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%, it was our new origination yield, and that’s 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 in the high end of what we’ve had for the last handful of quarters..

And then as far as the overhead -- as far as the core system changed, did you give a dollar amount of incremental cost that you expect it to hit in 4Q? I didn’t catch that..

It wasn’t -- 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..

Got it..

And then the $4 million to $5 million benefit will primarily kick in 2016 and beyond annually..

Thanks. Thanks for revisiting that.

And then last question I have for you is with regard to loss share contract expiration that you guys make note of the first hitting in late 2015, is that a fourth quarter event?.

It is, Tim..

And how much of the acquired covered book will be affected by the exploration of that contract? I’m assuming those are commercial loans..

Well, there is couple of 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, that worked our well in advance of getting anywhere near the end.

So that isn’t the one that’s really moving us, as much is the community banks of Colorado, which still has two years left on it..

So a lot of, kind of what we are seeing the ebbs and flows on a quarterly basis is really community Banks of Colorado stuff?.

Yeah. At this point, now, right..

Okay. Thanks for answering my questions..

Yeah. 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.

And so while we talk about the two remaining contracts and their termination dates, we would be in that camp that would be very interested for bringing early closure to two those contracts, if it made sense for our partners at the FDIC.

Having said that, our greatest motivation is that, frankly, it would bring better clarity to the actual learnings of the company..

Yeah.

Have you seen a blueprint for success and 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 this mark, on the part of the FDIC. But I would suggest it’s pre-matured to say that there was an established blue print.

So it should be no surprise that we’ve strong interest in and working to, with the professionals at the FDIC and determining if there is something that can be done there..

That’s good to know. Hey, one -- just real quick last question.

You characterized the bank you are acquiring has been commercial oriented in Colorado, did I hear that right?.

We would describe it as…..

A District Community Bank..

Yeah. We would describe it as being a community bank. Yeah, that’s exactly right, Tim..

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

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

I’m silent too..

It’s 31%..

Nice. Great. Thanks a lot, guys..

All right. Thank you..

Your next question comes from Gary Tenner with D.A. Davidson. Your line is open..

Thanks. Good morning..

Hi, Gary..

I just have a couple of questions. Just want to make sure I heard a couple of things correctly.

In terms of the tax rate outlook for ’15, Brian, did you say 30%, including the impact of the DTA of the $1.1 million?.

Yes. That’s correct..

Okay. And then 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 30 -- I know does not get amortized, I guess effectively would get written off.

Is that late, is that in the fourth quarter or would that have to be in actually in ’16?.

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

And remind everybody what the claw back is..

It is just part of the agreement that takes up 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. So we have a liability on the books today that’s above $36 million and is accruing up on a present value basis.

And it is through those accounts and also any sharing of gains and any sharing of our expenses go through that. So that’s the $23 million to $33 million just to be clear there.

Then on the amortization, there isn’t a cliff stopping point for the accounting and as Tim had said, it frustrates all of us from an economic perspective but it is the accounting. It gets every time we do a real to get spread over the remaining loss share period. And so there is no write-down at the period of time.

There is a stoppage, but we have $39 million that sits there as of the end of the year. That it comes off of the books as we build the FDIC for loss share or as we amortize that expense..

Brian, if I could add here, just to be clear what Brian had just said, it’s really important that there is again two ways, one is the right offer amortization and the other is the billings. So we still expect to have billings to the FDIC.

It is just that as we’ve gotten better and better results from these covered assets, the amount we expect to bill decreases..

And Gary, your question is getting a lot of retention and responses here because it is we think really the biggest challenge to uncovering that path to that one plus percent ROA.

And if there is 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 and you will all run your 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 long 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..

Okay. And if I’m -- yeah. I guess, just to make sure I’m looking at it right.

Then if you get -- let say, you’re at the high end to that range this year than that doesn’t necessarily mean that that line item get zeroed down in ‘16 but it should appreciably lower?.

That’s right..

Right. Okay..

Significantly lower..

Okay. All right. Thanks very much..

Yeah. Good question. Thanks, Gary..

Thank you. And that is all the time we have for question. So we’ll now turn the call back to Mr. Laney for any closing remarks..

Joan, I’m sensitive to that. Are there any other -- I know we are on the clock but I hate to cut any of our analysts off that we ….

Yes. Our last second to [Michael Trucco] [ph] Your line is open sir. Sorry. Gone. There’s no one in the queue. Okay. Peyton Green, I’m sorry. Peyton Green of Sterne Agee. Your line is open..

Hi. Yes. Good morning, Tim and Brian. I was wondering maybe if you can comment on the M&A pipeline.

Certainly, good to see you get a good Community Bank deal but what’s the activity look like and how it’s characterize and where it was six months ago?.

Well, we characterize that we’ve been very active in two fronts. One, we’re always interested in the banking landscape and it just hasn’t been a lot that’s come out there but we’re 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’ll share with you that we went deep into detail due diligence twice in the last four months. Back a way each time for a number of reasons that you’d be very pleased with but we continue to see opportunities that can fit within what we’re trying to do here. And we’ll be selective in pursuing those.

Hopeful that will make sense but very disciplined that we are worth making no mistakes for..

Okay. And then the follow-up question.

I mean, what is the level of capital? I know you have some significant excess capital but when do you maybe stop buying the stock back? Is there a TC ratio or total risk base level?.

At these levels in the market now they are very interactive to buyback. It is a balance. As we share with you before a couple of $100 million and you got opportunity that you put to use that will create more value and -- versus the buyback. And so we like the optionality that we’ve had in the opportunities in the pace of which we’re able to buyback..

And why don’t you remind everyone where we’re at in terms of Tier 1 capital, excess capital?.

I didn’t calculate that. We’re sitting at -- anything above 10% is still at this stage would be considered excess capital. Although, as we shared with you, that’s because of an operating agreement that we still have in place and that operating agreement we expect overtime to give us a little more room below that 10%. So it’s still a large number.

It was 200 -- I want to say, 225 at the end of the third quarter..

Okay.

So, I mean, in that 10% Tier 1 leverage, just to make sure, I have got the right number, correct?.

Correct. That’s correct..

Okay..

And we’re about 15% plus today..

Yeah..

And that 10% leverage was required in an operating agreement in order to obtain the charter for the Bank. We’re well above that 10% requirement. And so, long story short, you’re going to continue to see us be pretty aggressive in buybacks. With the mindset, here is 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.

And 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, they’re going to have to here at very high standards or require -- acquiring our own shares, in that current trading prices we view that is the best acquisition we could make.

I mean, acquiring at or close to tangible block we are effectively realizing no word back period immediately accretive kind of actions and we’ll do that all day long. Let's say, we got to a scenario where we're on top of a 1% plus ROA and still had access capital.

There is 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 in where we can. So it’s another great question and that's how we think about capital management..

Okay..

Hey, Peyton, we’ll give that number. It’s about $200 million at the end of the year that we would consider to be access capital..

Okay. Yeah. No. I was just making sure we are still at the 10% level..

Okay..

And then on the cash dividend, would you anticipate pumping at or as long as the reported earnings state, somewhat depressed would you keep it down here?.

Yeah. That’s another one we’ve discussed quite a bit internally. We think it’s appropriate to keep it where it’s at this time..

Okay. Great. Thank you for taking my questions..

Absolutely. Thanks for asking. Joanna, it sounds like that must be it. So I’ll just wish everyone a very good day and thank you for tuning in for the call today..

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 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..