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Edited Transcript of NBHC earnings conference call or presentation 24-Jul-19 3:00pm GMT

Q2 2019 National Bank Holdings Corp Earnings Call

Boston Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of National Bank Holdings Corp earnings conference call or presentation Wednesday, July 24, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aldis Birkans

National Bank Holdings Corporation - Executive VP, CFO & Treasurer

* G. Timothy Laney

National Bank Holdings Corporation - Chairman, President & CEO

* Richard U. Newfield

National Bank Holdings Corporation - Chief Risk Management Officer

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Conference Call Participants

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* Gordon Reilly McGuire

Stephens Inc., Research Division - Research Associate

* Kelly Ann Motta

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Robert James Shone

Piper Jaffray Companies, Research Division - Research Analyst

* Timothy O'Brien

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the National Bank Holdings Corporation 2019 Second Quarter Earnings Call. My name is Simon, and I will be your conference operator 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 Chairman, President and CEO, Mr. Tim Laney.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [2]

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Thanks, Simon. Good morning, and thank you for joining National Bank Holdings Second Quarter 2019 Earnings Call. I have with me our Chief Financial Officer, Aldis Birkans; and Rick Newfield, our Chief Risk Management Officer. We're pleased to report another record quarter of earnings on the back of strong earning asset growth and solid transaction deposit growth. It's noteworthy that our noninterest-bearing deposits grew at an annualized rate of 17.2% during the quarter. Our focus on earning the full banking relationships of our clients is paying dividends. Our markets continue to perform better than the national averages on virtually every measure, and our teams continue to capture our fair share of the growth.

Now before turning the call over to Aldis, I'll point out that our team delivered a record level of fee income during the quarter, and that our annualized net charge-offs on originated and acquired loans were only 2 basis points. Aldis?

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [3]

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Thank you, Tim, and good morning. As you saw in yesterday's release, we reported record quarterly net income of $20.3 million, and record earnings per diluted share of $0.64 for the second quarter. This is an increase of $1.4 million or 7.2% on a linked quarter basis and a 15.8% increase over the second quarter of 2018. This quarter's financial results were driven by 10.7% annualized growth in our earnings assets, reflecting the steady progress on our loan and deposit growth as well as a strong quarter from our residential mortgage group. In my following comments, I will give a more detailed update on the results for the quarter, and an update on our guidance for the rest of the year.

Led by strong commercial loan growth of 18.5% annualized, total originated and acquired loans outstanding grew a solid 8.3% annualized this quarter. New loan originations were $290.5 million for the quarter, and our year-to-date loan balances have grown 12.4% annualized. For the first 6 months of 2019, we saw strong commercial loan demand as 68.5% of 2019's loan production was in commercial loans. This has been driven by a growing demand for working capital and other investment activity from businesses within our footprint. Our pipeline remains strong and the local economies continue to perform better than the national averages. Based on this momentum, we believe we will achieve a 10% originated and acquired loan balance growth for the full year 2019. This is on track with the guidance we shared last quarter.

On the other side of the balance sheet, we continue to be pleased with the growth of our core relationship deposits. Average noninterest-bearing deposit balances grew 17.2% annualized on a linked quarter basis, and our noninterest-bearing deposits now represent 24.9% of total deposits. Our total average transaction deposits grew 7.7% annualized, and we expect this momentum to carry into the second half of 2019. As such we are reaffirming our guidance for average transaction deposit growth in the mid-single digits for full year 2019, with time deposits staying relative flat. The second quarter's transaction deposit cost was just 40 basis points. Coupled with the new loan originations that came on at 5.2% during the second quarter, we delivered solid net interest income growth. Our linked quarter taxable equivalent net interest income increased $1.4 million or 10.6% annualized, in spite of declining market rates throughout the quarter. Fully taxable equivalent net interest margin for the quarter was 4%. If the Fed follows through with a widely expected interest rate cut at the end of July, we will experience a slight decrease in our net interest margin. As such, I will break our long-standing tradition of not incorporating any Fed rate moves into our guidance. Assuming a 25 basis point Fed funds target rate cut in July, we expect our fully taxable equivalent net interest margin to be in the mid 3.90s for the remainder of 2019. Earning assets should end the year at around $5.4 billion or at the upper end of our previous guidance.

With regard to credit, once again this quarter annualized net charge-offs were a low 2 basis points. In fact, the only blemish on an otherwise clean quarter from credit is a $2.4 million specific reserve we took on a loan that came over with the Peoples Bank acquisition. Unfortunately, the loan deteriorated post-acquisition and before we could move it out of the bank. Our team is working to resolve this [credit].

For the second half of 2019, we are expecting the provision expense to be in the range of $5 million to $6 million. During the second quarter, we also realized record noninterest income of $20.7 million, which was $3.6 million higher than the first quarter of 2019. Our combined service charges and bank card fees grew a solid 7.2% linked quarter. This was driven by both the success of our teams growing core banking relationships and seasonal activity. The gain on sale of residential mortgages increased $3.5 million linked quarter, driven by seasonal growth in home purchase activity, which we had expected as well as pick up in refinancing activity due to lower rates. In a decreasing rate environment, we typically expect some level of earnings pickup that comes from our residential mortgage production activity to act as a hedge to the rate impact on our net interest income and I'm glad it has proven to be the case already. Looking ahead, we project our total noninterest income for the second half of 2019 to be in the $34 million to $36 million range, with the third quarter being seasonally higher than the fourth. Effectively, this increases our full year noninterest income guidance by almost $2 million. Regarding expenses, our second quarter's noninterest expense totaled $46.5 million and increased $2.1 million from the prior quarter. The linked quarter increase was entirely driven by the increase in the total compensation line, more specifically, the increase was largely driven by residential mortgage commission expense. As we can -- have consistently demonstrated during prior quarters and years, we continuously focus on expense efficiencies and expect to achieve total core expenses in the $91 million to $92 million range for the second half of 2019. Additionally, on a year-to-date basis, we have incurred a net $1.2 million in OREO and problem asset workout expense, which as we discussed during the last earnings call, we expect to recover the OREO gains later this year. The effective tax rate for the quarter was 13.6% and included $1.3 million benefit related to stock compensation activity. Excluding this, the effective tax rate for the quarter was 19.4%. For the rest of 2019, we expect the effective tax rate to be in the previously guided 18.5% to 19.5% range. Finally, as it relates to capital, we finished the quarter with a 10.6% Tier 1 leverage capital ratio, and the tangible book value per share increased to $19.83 driven by our record earnings.

Tim, that concludes my comments.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [4]

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Thank you, Aldis. Well, needless to say we are very pleased with our first 6 months of performance during 2019. And more important, we feel good about our momentum as we enter the third quarter. Our intense focus on earning a full relationship of our clients is producing strong results. Looking ahead, we believe we can continue to increase our return on tangible common equity while growing a safe and secure balance sheet. To be clear, we think there's a lot to like about where we're headed. And on that point, Simon, we are ready to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Jeff Rulis with D.A. Davidson.

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Unidentified Analyst, [2]

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Jeff's associate actually on for him. I just was hoping you guys could kind of touch on capital plans moving forward. Is there any thoughts on M&A from either side as a buyer or seller? And have you guys just had any discussion for the kind of change on that front as far as what you're hearing internally or market chatter? Just kind of revisiting that topic.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [3]

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Well, certainly, the pace at which we're building capital is a good problem to have, I guess, one would say. And like a broken record, it's important to point out that we continue to embrace optionality. We like the idea of -- and the fact that we are in multiple discussions with a lot of potential partners, and we'll see where some of that takes us. But as you'd seen in the past, we're pretty slow and methodical when it comes to creating the kind of opportunity like you saw us create with the Peoples acquisition. I don't know, Aldis, is there anything else you would add?

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [4]

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No.

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Unidentified Analyst, [5]

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Great. And then just kind of when we're talking about fee income and the mortgage banking segment, you guys see kind of growing this above industry average, expanding it platform-wide potentially? And with that were salaries up due to higher mortgage production? Just kind of trying to link those questions together.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [6]

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Right. I'll take the first question and then maybe toss the comp expense or commission expense to Aldis. We're going to be very focused on not letting the mortgage business grow to more than, call it, 15% of our revenue. We're sensitive to taking on that kind of, just to be frank, mortgage banking multiple. What we like about what we're doing is that it's focusing on serving clients in the markets where we do business. We also like what we're seeing because in some ways and, Aldis, you may want to speak to this, we can almost view the refinance revenue that we're seeing right now with rates low as a hedge against pressure that it might put on other parts of the balance sheet. So I like that diversification. Aldis, as it relates to the commission expense, I think that's pretty straightforward, but I'll toss it to you.

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [7]

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Yes. Just to finish Tim's thought. We are looking at this as a hedge as the rates move -- rate environment moves up or down to what's happening to our asset sensitivity with the balance sheet. And to Tim's point, in the past, [over the] last year our production was 80% purchase-based and only 20% refinancing. This quarter that ticked up to 75%, 25%, potentially moving into third quarter more closer to 30% refinancing. So that business of refinancing is picking up as the rates -- the rates have fallen and are acting, as you can see this quarter, as an offset to what potentially could happen with the LIBOR rates going down. On the expense side, I'll say that, yes, majority -- $1.8 million of the $2.1 million increase in our noninterest expense was due (inaudible) to commission and incentive base -- or related to commission and incentives.

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Unidentified Analyst, [8]

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Awesome. All right. And then kind of just one last one, broad picture here. How are you guys feeling about the credit profile? And just broadly in the industry, is there anything you guys are hearing, just kind of some more color on the credit picture?

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [9]

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Well, certainly watching a number of these second quarter -- or reading a number of these second quarter releases from institutions has given us reason just to visit again particular sectors like agriculture. I'll remind everyone, we're not a big commercial real estate player. We're now down -- in fact, we've talked a bit being under or right at 100% of capital on commercial real estate versus that threshold of 300%. We actually shrank here in the first half of the year. I think we're at -- what are we, 95%?

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Richard U. Newfield, National Bank Holdings Corporation - Chief Risk Management Officer [10]

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We're 95% of risk-based capital on CRE.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [11]

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95% of risk-based capital. Rick can speak later if anyone's interested on areas like agriculture, but we feel good about that. I'll remind you that on energy, we exited that space, dismantled our team several years ago, we've got a very small [tail load] of business there that Rick can speak to that we feel good about. So it's well to me while I guess a lot of folks have talked about kind of just one-off industry issues. It felt for the first time like we were hearing about some more systemic kind of cracks, which just gives us cause to look that much harder at our stress testing to make sure we're in a position to take advantage of a down -- economic downturn, should that happen. But again, maybe we can get into some more details in some of those spaces with Rick later.

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Operator [12]

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Your next question comes from the line of Gordon McGuire with Stephens, Inc.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Associate [13]

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Maybe starting on the NIM. Aldis, with the July cut, you said mid-3.90s for the rest of this year. So is it pretty fair to think about if we're assuming more than one cut this year? It's about 5 basis points per 25?

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [14]

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I'd say 5 to 7 basis points per 25.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Associate [15]

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Got it. And just digging in kind of the mechanics of that. I appreciate that you've been reducing asset sensitivity but I was wondering if you could provide an update as far as your variable/fixed mix. What kind of loan repricing durations we're looking at? And maybe any colors on -- color on floors you could give?

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [16]

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Yes. We've been adding fixed rate assets. And actually if you look at our other noninterest income fee line item this quarter was lighter because we stayed away from the swap opportunities and adding -- letting our bankers add fixed rate loans instead of variable rate loans being [taxed...]

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [17]

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And remind -- and remind everyone, when we're talking about fixed kind of the...

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [18]

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Yes. Yes, it's 3- to 5-year fixed-rate loans obviously. We don't do 10- or 15-year fixed-rate loans on balance sheet. The -- in terms of the book right now it's approximately 48%, 49% are -- of the book is linked to either LIBOR and/or prime. Most of it is linked to the LIBOR, so we started seeing some of that rate impact in the second quarter. If you look at one-month LIBOR got compressed, on average basis, 6 basis points versus first quarter, which pleases me to look at our earning asset yield actually expanding 4 basis points even with that headwind. So we are very happy with our teams being able to add. As I mentioned in opening remarks, our new loans came out at 5.2%, still accretive to the existing originated book. So that's working in our favor. And I think that's it.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Associate [19]

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Okay. Anything on floors you can give us? Or should we think about that 48% to 49% being pretty...

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [20]

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Yes. About -- you're right. The floor set is interesting because you keep on adding floors. But the floors -- our rates are moving up or at it and -- at the rate environment was much lower than this one. So the next 25 or 50 basis points really is not going at the floor level, so not benefit for us. So it -- unless we really find ourselves next year in a much lower rate environment, we can revisit the floor discussion.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Associate [21]

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Got it. Maybe switching to the deposit side. CD costs were up, call it, 15 basis points this quarter. I was wondering if you could give any color on what you're -- what deposits are repricing at from a cost perspective and then maybe the cost of what might be maturing at this point? Just trying to think about the tail of the increases there.

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [22]

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Yes. A very -- great question. So our weighted average CD cost in second quarter came on, let's say, around 1.5%. The reason for the increase in CD book outstanding cost of funds was because what was rolling off was at lower levels. That will continue to take place here in the third quarter. Stuff that's coming off will be in low 1s. So the -- unless we see dramatic shift here in CD rates on marginal basis, we will continue seeing some drift up in CD costs in the third quarter and that should stabilize going into fourth quarter, all else equal obviously.

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Operator [23]

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Your next question comes from the line of Chris McGratty with KBW.

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Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [24]

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This is actually Kelly Motta on for Chris. My first couple of questions have to do about the mix of the balance sheet. Your loan-to-deposit ratio is now up to 92% versus about 82% year-over-year. I'm wondering if you have a target of where you'd like to be here and how you're thinking about that funding mix?

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [25]

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Yes. I think we still -- we've said this before, but we're very comfortable letting this next shift to mid-90s, so call it 95% give or take. We certainly don't want to become a wholesale funded bank. So going beyond 100% is something that we will look to avoid and [crank] up and think differently about how we grow deposits. But mid-90s, we feel very comfortable to funding this balance sheet with the -- in the markets we operate.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [26]

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And Kelly, this in some ways ties back to Gordon's previous question as well on CDs. I want to emphasize that we feel -- we believe that's the lever we can easily pull if we wanted to grow deposits. Our real focus obviously is on core relationship accounts, core operating accounts, driving low-cost deposits that's, once again, a more kind of methodical approach to growing the business. But we really haven't had to pull that lever on interest-bearing deposits to grow and that's still available to us. And the good news is, with the Fed's moves and kind of the understanding of rates coming down, buy market coming down, we're seeing clients' expectations lower on those interest-earning deposits. Aldis didn't touch on it, but we have been able to successfully begin to bring down rates in a number of those deposit interests -- deposit earning instruments that will serve us well over time. So that's just a little more color as it relates to managing that loan-to-deposit mix.

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Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [27]

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Great. And then with the securities, those are down as well to about 18% of average earning assets. How should we be thinking about where this troughs just with managing liquidity?

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [28]

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Yes. No, it's a great question. As we model liquidity, we -- I expect that we will start reinvesting the investment portfolios next year. And we'll target what -- the way we model liquidity and the minimum on balance sheet available sort of liquid assets to be modeled. We'll need it about -- that ratio to be around 15% to the total assets.

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Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [29]

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15%. Okay. All right. And then switching gears, just wondering what you're modeling for accretable yield for the remainder of the year, and how we should be thinking about it in 2020 with the implementation of CECL?

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [30]

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Yes. For the rest of year, the accretable yield from 310-30 will be between, call it, $5.5 million to $6 million from that book. We finished the quarter right around $60 million. I expect that will be now down in low 40s. There are several larger credits that we expect cash flow will come out of that book. Going into the next year then -- with CECL, most of these loans are almost entirely -- all the remaining loans are performing. So we will blend it in, in our overall loan book and it's going to continue accrete effective yield on going -- going forward basis.

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Kelly Ann Motta, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [31]

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Okay. And then one last housekeeping item, if I could. The effective tax rate, that is on a fully taxable equivalent basis? Is that correct? [Right?]

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [32]

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Yes.

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Operator [33]

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Your next question comes from the line of Tim O'Brien with Sandler O'Neill + Partners.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [34]

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Tim, can you talk a little bit about the lending environment. I'm hearing from other sources a lot of discussion about intensity of competition being higher or more fierce now across the board. And are you seeing that in your markets? It doesn't seem to affect your origination business much, but what are you sensing is going on in the market out there right now? And is it affecting your business on the margin?

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [35]

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Well, I -- as Aldis, shared earlier. We actually -- we're very pleased with the kind of yields, the kind of pricing we were seeing in our commercial and business banking or small business banking space, not only in the second quarter but through the first half of the year. I think we benefit from operating in very strong markets. As you know, we've had -- in fact, some of our competitors move away, to be acquired away here in the last year or so. That does occur. But I would say what's really important is when we look at our core markets, for the most part we have rational competitors, both as it relates to pricing and credit or risk management. So I think, in some respects, we benefit from market tailwinds, and we continue to benefit from just the growing momentum of the experience of our banking team seeking full relationships and having some success there. I don't know, Tim, if you'd like Rick -- Rick is here, to speak to maybe any of the specific industries. Again, we've seen some issues pop with other institutions with agriculture and, of course, energy. But would that be helpful, Tim, to have Rick jump in?

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [36]

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Yes. That'd be great. Love to hear that. And particularly with regard to how it affects your markets and the potential risk to local economies you operate in.

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Richard U. Newfield, National Bank Holdings Corporation - Chief Risk Management Officer [37]

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Yes. This is Rick. So let me start with that high level and maybe to further some of Tim's comments. When we talk about the markets, it's also the diversification of the economy. And as you know, from day one, we've been very disciplined around our concentrations, so that we maintain that diversification, so we don't have an outsized impact if a particular sector softens. And maybe to give you a little more color on certainly an area that has seen some stress over the last several years. Probably over the last 9 months or so, there have been a number of issues that some banks have reported, that would be agriculture, and we refer to it as food and agri business because we've had a team in place for a number of years that specializes in this area. And more than 3 years ago, we began selectively exiting [raw] crop producers and cattle operators that were concentrated and/or we could capitalize to be preemptive. Our team has been focused on larger, diversified and lower-leverage operators, and particularly those that are downstream from production and -- I'm sorry, from growing in production. I'll also point out, over the last 12 months we've incurred virtually no net charge-offs in agriculture, only about $18,000. So just as an example of a sector that we've been selectively exiting certain types of risk and being very thoughtful about our exposure. Maybe just one more point about how we look at concentrations, the total food and agri business is $241 million or about 5.6% of total loans.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [38]

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And then on a space like energy, we're fortunate that Colorado has radically diversified its economy away from energy. So we really -- even in the last dramatic downturn, we concerned ourselves with the derivative impact in that -- kind of that secondary, tertiary impact, and [didn't really] see it. And then Rick, you may want to speak to the -- again, we dismantled our energy team several years ago that you may even want to talk about what we have specifically remaining there?

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Richard U. Newfield, National Bank Holdings Corporation - Chief Risk Management Officer [39]

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Yes. I mean we haven't originated any new energy business, I believe, in well over 4 years. So again, to your point, Tim, we just exited...

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [40]

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Not what we do.

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Richard U. Newfield, National Bank Holdings Corporation - Chief Risk Management Officer [41]

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Not what we do. We do have about $43 million remaining. And we have 1 residual problem loan that we're working to resolve, it's well under $1 million. And the rest of that portfolio is stable and performing well. And I'd expect to continue to reduce that expenditure.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [42]

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And it's declined how much even in a...

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Richard U. Newfield, National Bank Holdings Corporation - Chief Risk Management Officer [43]

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I think $12 million year-to-date. It's pretty meaningful percentage now...

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [44]

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Basically a run-down (inaudible).

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Richard U. Newfield, National Bank Holdings Corporation - Chief Risk Management Officer [45]

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Other industries, I mean, real estate, look -- I guess I am lairy. Because I tend to believe that that's a space that at this point in the cycle arguably could be seen as overvalued across the board. I've heard people speculate as much as 20% kind of across all sectors. So I'm happy that we're very selective that it's not an area that we're looking to grow, again, only 95% of risk-based capital. It just comes back to the simple idea of not having all of our eggs in one basket.

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Operator [46]

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Your next question comes from the line of Nathan Race with Piper Jaffray.

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Robert James Shone, Piper Jaffray Companies, Research Division - Research Analyst [47]

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It's Bob on for Nate. I just wanted to touch -- you guys kind of talked about the lending segment, but I want to talk more about geography. Could you guys kind of give some color around where you saw growth this quarter? And -- or you may be excited about in the second half '19 and into 2020?

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [48]

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Right. Right. Well, look, it's hard to single out a particular market because we're at a point where all of our markets and our teams in those markets are performing well. We certainly are benefiting here in Colorado. Our Texas team has come on strong in Dallas and Austin. We're really pleased with our newest team in Salt Lake City and Kansas City and that broader Overland Park market, we -- look, we see increasing momentum, and we're just -- look, it's -- we clearly benefit from being in a set of strong markets across the board. In terms of looking ahead to the remainder of this year, I hope what you heard Aldis say, maybe I'll reemphasize it, is that we're in a position of not only reaffirming our guidance at the beginning of the year, but suggesting that we think we've got a very good shot at beating that guidance. And that's both on revenue growth and expense management when it comes right down to it. So I would say, it's a combination of being in great markets and then the maturation of our teams working our relationship banking approach to capturing and retaining business. I don't know, Aldis or Rick, anything you would add?

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Richard U. Newfield, National Bank Holdings Corporation - Chief Risk Management Officer [49]

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Agree with what you said.

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [50]

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Exactly, yes.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [51]

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Bob, does that help or (inaudible) sorry, the one question we didn't (inaudible) about next year and I'm -- man, I'm just not ready to get that far out over my skis, but I appreciate the question.

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Robert James Shone, Piper Jaffray Companies, Research Division - Research Analyst [52]

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No. That's just fine. And then one more from me. Regarding the credit that you took a $2.4 million reserve on, could you give us any more color around how big the relationship is? And what industry it is in?

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Richard U. Newfield, National Bank Holdings Corporation - Chief Risk Management Officer [53]

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Sure, Bob. This is Rick. So I mean -- let me start, just to be clear, and maybe I've alluded to this, we don't see any systematic issues, we see this as a one-off. It's a C&I loan that came over with the Peoples acquisition with exposure now to your specific question around $10 million. Our desire would have been to get this loan off the books before it deteriorated. One thing that maybe some of your colleagues or counterparts on the phone know, the good news is we have a special assets team that has a terrific track record of working through acquired and other problem loans with solid recoveries.

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [54]

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Yes. I'll just jump in here and remind that when we acquired Peoples Bank, at the time we marked that book at $9.8 million. This loan was accruing and performing loan at that time, so there was nothing specific allocated to this loan. But as of end of this quarter, we had $6.8 million so that mark's still remaining and still yet to be accrued to our financials, and we view that as basically a protection against this loan and anything else that may come on.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [55]

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And maybe, Aldis, just one other point on that is that when I look at the rest of the acquired Peoples loans and those upfront marks, we work through problems at better than the original expectations. Again, back to your point about -- cover a good point.

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Operator [56]

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Your next question comes from the line of Gordon McGuire with Stephens, Inc.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Associate [57]

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Thanks for taking another question. Aldis, the fee income guidance for the back half of the year, it was $34 million to $36 million. Did I get that correctly?

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [58]

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Yes, sir.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Associate [59]

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So that seemed a little bit light to me. Running year-to-date, it seems like just if few [matters that] the year-to-day you should be getting round about $75.5 million. Is there something that I'm missing?

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [60]

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Gordon, I just -- I'm laughing. This is Tim. I'm laughing because I said the same thing to my teams.

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [61]

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Look -- so a couple of things. One is we are starting quite well off in mortgage production and gained some sale here in July. How long that lasts, it's hard to predict, so we're trying to be realistic relatively looking how year ended last year in fourth quarter.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [62]

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I keep hearing the word tempered.

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [63]

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The other component that we're not counting that we did benefit in the first half of the year, we're not counting on those swap fees in the second half of the year, and that does add up to $1 million or so.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [64]

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And that is real. I mean the swap fees would -- that's back to repositioning balance sheet that's [real] impact. But look, at this point, Gordon, I think your question is insightful, not only are we seeing, as we march into the third quarter, better-than-expected fee income coming out of residential banking, we're also seeing continued pickup in our fee income out of our consumer bank in general. And so I guess, if there's a temperance, it's been somewhat concerned about just the general volatility in the market and where the economy is going. But my goodness, based on what I'm seeing, at least third-quarter-to-date, I'm feeling pretty good about our ability to beat that number. Now Aldis is cringing. I wish you could see him, but I'll leave it at that.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Associate [65]

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Okay. So there wasn't anything unusual this quarter in the mortgage, like unusual pricing or anything that was...

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [66]

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No. No, no, it's all volume-driven pickup.

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Operator [67]

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Your next question comes from the line of Tim O'Brien with Sandler O'Neill + Partners.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [68]

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One follow-on. Just you guys mentioned adding or -- low swap fees this quarters. So how much in additional fixed income loans did that add to the portfolio in the quarter? Is it just the CRE piece? $41 million?

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [69]

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No. No, no, it -- I would characterize it is in a past [end] quarters before and year -- last year we were adding -- about 65% to 70% of new loan originations would have been in variable rate loans. This quarter, it was around 50%, 55%. 50% to 55% was variable rate.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [70]

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Do you know the dollar amount? Top of mind, the incremental dollar amount? We can follow back up with you, Tim.

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [71]

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Be about $150 million.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [72]

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Yes.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [73]

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$150 million or $115 million?

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [74]

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$150 million, right? We had about $290 million loan production this quarter, half of that was fixed, half of it's variable.

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Operator [75]

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

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [76]

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All right. And before I close, I think Aldis had one other follow-up item.

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [77]

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Yes, Kelly, I just wanted to make sure that I answered your question right in terms of the tax equivalent, more -- effective tax rate guidance. So what we guide to is tax expense line item that does -- that excludes the tax equivalent adjustments. So it's a tax -- income tax expense item divided by income tax before -- sorry, income before income taxes, so it excludes the tax equivalent. I just want to make sure that I answered that question properly.

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G. Timothy Laney, National Bank Holdings Corporation - Chairman, President & CEO [78]

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All right. Thank you, Aldis. I appreciate that. As I said before we really are pleased with our first 6 months of performance during this year. Equally important, we really feel good about our momentum as we move into the second half of the year and we really do believe that there's a lot to like about where we're headed. So thank you for your interest, and have a good day.

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Aldis Birkans, National Bank Holdings Corporation - Executive VP, CFO & Treasurer [79]

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Thanks.

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Operator [80]

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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 August 6, 2019, by dialing (855) 859-2056 or (404) 537-3406 and referencing the conference ID of 749-2217. The earnings release and an online replay of this call will also be available on the company's website on the Investors Relations Page. Thank you very much, and have a great day. You may now disconnect.