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National Bank Holdings Corporation (NYSE:NBHC)
Q2 2019 Earnings Call
Jul 24, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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]

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.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

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 non-interest 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. And 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?

Aldis Birkans -- Chief Financial Officer and Treasurer

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 earning 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 a 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 six months of 2019, we saw strong commercial loan demand at 68.5% of 2019's loan production was in commercial loans. This has been driven by a growing demand for working capital and -- another investment activity from businesses within our footprint. Our pipelines remained 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 balanced 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 non-interest bearing deposit balances grew 17.2% annualized on a linked-quarter basis. And our non-interest bank deposits now represent 24.9% of total deposits. Our total hours 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 2018, with time deposits staying relatively flat.

The second quarter's transaction deposit cost was just 40 basis points, coupled with 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 breakout long-standing tradition of not incorporating any Fed rate moves into our guidance. Assuming a 25 basis points Fed fund's 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, we're 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 for credit is a $2.4 million specific reserve, we took on a loan that came over with the People's 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 -- we are expecting the provision expense to be in the range of $5 million to $6 million. During the second quarter, we also realized the record non-interest 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 team's 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 pickup in the 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 non-interest 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 non-interest income guidance by almost $2 million. Regarding expenses, our second quarter's non interest 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 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 last earnings call, we expect to recover that 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.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Thank you Aldis. Well, needless to say, we are very pleased with our first six 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 the 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 is a lot to like about where we're headed.

And on that point, Simon. We are ready to open the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And your first question comes from the line of Jeff Rulis with D.A. Davidson. Go ahead, your line is open.

Aldis Birkans -- Chief Financial Officer and Treasurer

Good Morning.

Unidentified Participant

Hey, guys.

Aldis Birkans -- Chief Financial Officer and Treasurer

Good morning.

Unidentified Participant

Good morning, this is Jeff's associate actually on for him. I just was hoping you guys kind of touch on capital plans moving forward. Is there any thoughts on M&A from either side as buyers -- buyer, seller? And have you guys just had any discussions that kind of changed on that front as far as what you're hearing internally or a market shattered just kind of revisiting that topic?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Well, certainly the pace at which we're building capital is a good problem to have, I guess, one would say. And like the 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, you know, we'll see where some of that takes us. But as you've 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 People's acquisition. I don't know Aldis, is there anything else you would add?

Aldis Birkans -- Chief Financial Officer and Treasurer

No.

Unidentified Participant

Great. Thanks. And then, you know, just kind of, you know, when we're -- when we are talking about fee income in the mortgage banking segment, you guys see now, 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.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

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, multiples. What we like about what we're doing is that it's focusing on serving clients in the markets where we do business. We all -- also like what we're seeing because in some ways and Aldis, you may want to speak to this. You know, 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.

Aldis Birkans -- Chief Financial Officer and Treasurer

Yeah, just to finish Tim's start. We are looking this as a hedge as the rates move -- rate environmental 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% of the refinancing. This quarter that ticked up to 75, 25, potentially moving into third quarter more or closer to 30% of refinancing. So that business of refinancing is picking up as the rates have fallen and I think, 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, yeah majority -- $1.8 million of the $2.1 million increase in our non-interest expense was due into commission and incentive base or it is related to commission and incentives.

Unidentified Participant

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

Aldis Birkans -- Chief Financial Officer and Treasurer

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 bound, in fact, we've talked about being under 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, Rick, what are we? 95 --

Richard U. Newfield -- Chief Risk Management Officer

We are 95% of risk based capital.

Aldis Birkans -- Chief Financial Officer and Treasurer

95% of risk based capital. Rick can speak later if anyone is 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 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's 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.

Unidentified Participant

Awesome. Thank you so much, guys. That was great color. I'll step back now.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

All right. Thank you.

Operator

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

Gordon McGuire -- Stephens Inc -- Analyst

Good morning.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Good morning.

Gordon McGuire -- Stephens Inc -- Analyst

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 are assuming more than one cut this year? It's about 5 basis points per 25.

Aldis Birkans -- Chief Financial Officer and Treasurer

I'd say 5% of basis points per 25.

Gordon McGuire -- Stephens Inc -- Analyst

Got it. And just digging in kind of the mechanics of that. I appreciate that you've been reducing acid 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 color on floor if you could give?

Aldis Birkans -- Chief Financial Officer and Treasurer

Yeah, we've been adding fixed rate assets. And actually, if you look at our other non-interest income fee line item, this quarter was lighter because we stayed away from these swap opportunities and added -- letting our bankers add fixed rate loans instead of variable rate loans being fixed --

G. Timothy Laney -- Chairman, President and Chief Executive Officer

And remind everyone when we're talking about fixed kind of that --

Aldis Birkans -- Chief Financial Officer and Treasurer

It's a three to five year fixed rate loans, obviously, we don't do 10 year or 15 year fixed rate loans on balance sheet.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

In terms of the book right now, it's approximately 48%, 49% are -- of the bulk is linked to either a LIBOR and or prime. Most of it is linked to the LIBOR. So we've started seeing some of that rate impact in the second quarter. If you look at -- LIBOR that compressed on average basis 6 basis points versus first quarter, which pleases me to look at that earning asset yield to 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 the opening remarks, our new loans came out of 5.2% still accretive to the existing -- originated book. So that's working in our favor and I think that's it.

Gordon McGuire -- Stephens Inc -- Analyst

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

G. Timothy Laney -- Chairman, President and Chief Executive Officer

About, you are right. You know, the floors I think is interesting because we keep on adding floors. But the floors -- the rates are moving up or added in -- at the rate environment, that was much lower than this one. So the next 25 or 50 basis points really is not going to be at the floor, floor levels will not benefit for us. So unless we really find ourselves next year in a much lower rate environment, we can revisit the floor discussion.

Gordon McGuire -- Stephens Inc -- Analyst

Got it. Maybe switching to the deposit side. CD calls for a 15 basis points this quarter, I was wondering if you'd give any color on what deposits you 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 detail of the increases there.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Very good. 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, it will be in low ones. So 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.

Gordon McGuire -- Stephens Inc -- Analyst

Got it. That's all I had, thank you.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yeah. Thank you, Gordon.

Operator

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

Kelly Motta -- KBW -- Analyst

Hi. This is actually Kelly Motta on for Chris. How's it going?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Hi, Kelly. Well, thank you.

Kelly Motta -- KBW -- Analyst

Great. My first couple of questions have to do about the mixed 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 in -- how you're thinking about that funding next? Thanks.

Aldis Birkans -- Chief Financial Officer and Treasurer

Yeah, I think we still -- we've said this before, but we're very comfortable letting this mix shift to mid-90s. So call a 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 to grow deposits. But mid-90s we have felt very comfortable to funding this balance sheet with the -- in the markets that we operate.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

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 a 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, bond 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 interest -- 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.

Kelly Motta -- KBW -- Analyst

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 trough just with managing liquidity?

Aldis Birkans -- Chief Financial Officer and Treasurer

You know it's a good question. As we model liquidity, I expect that we will start reinvesting the investment portfolios next year and will target what -- the way we model liquidity and then minimum on balance sheet available sort of liquid assets to be modeled. We will need it about that ratio to be around 15% to the total assets.

Kelly Motta -- KBW -- Analyst

15%. Okay, all right. Thank you. And then switching gears, just wondering what you're modeling for a credible yield for the remainder of the year? And how we should be thinking about in 2020 with the implementation of [indecipherable]?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yeah, for the rest of the year, the accretable yield from 3 -- 10, 30 both 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 loan come out of that book. Going into the next year, in the CECL, most of these loans are almost entirely all of the remaining loans are performing. So we will blend them in, in our overall loan book and it's going to continue to accrete effective yield on going forward basis.

Kelly Motta -- KBW -- Analyst

Okay. And then one last housekeeping item, if I could, the effective tax rate. That is on our fully taxable equivalent basis. Is that correct guide?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yeah.

Kelly Motta -- KBW -- Analyst

All right. Great. Thank you.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Thank you, Kelly.

Operator

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

Tim O' Brien -- Sandler O'Neill Partners -- Analyst

Good morning, guys.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Hey, good morning.

Aldis Birkans -- Chief Financial Officer and Treasurer

Good morning.

Tim O' Brien -- Sandler O'Neill Partners -- Analyst

Hi, Tim. Could you talk a little bit about the lending environment, hearing from other sources, a lot of discussion about intensity of competition being higher, 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 your sensing is going on in the market out there right now? And is it affecting your business on the margin?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Well, like, you know, as all this shared earlier, we actually were 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 and be acquired away here in the last year. 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, you know, 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, you know, would that be helpful Tim to have Rick jump --

Tim O' Brien -- Sandler O'Neill Partners -- Analyst

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

Richard U. Newfield -- Chief Risk Management Officer

Yes. Hey, Tim, good morning. This is Rick.

Tim O' Brien -- Sandler O'Neill Partners -- Analyst

Hi, Rick.

Richard U. Newfield -- Chief Risk Management Officer

Let me start with that high level and maybe to further some of Tim's comments, 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 and probably over the last nine months or so, there have been a number of issues that some banks have reported that would be agriculture. And we referred to it as food and agri business because we've had a team in place for a number years that specializes in this area. And more than three years ago, we began selectively exiting low crop producers and cattle operators that were concentrated and or weakly capitalized to be pre-emptive.

Our team has been focused on larger, diversified and lower leverage operators and particularly those that are downstream from production and started 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 agro business is $241 million or about 5.6% of total loans.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

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've concerned ourselves with derivative impacts in that kind of that secondary, tertiary impact and definitely see it. And then Rick, you may want to speak to, you know, again. We dismantled our energy team several years ago that you may even want to talk about what we have specifically remaining there.

Richard U. Newfield -- Chief Risk Management Officer

Yeah, I mean, we haven't originated any new energy business, I believe, in well over four years. So again to your point, Tim. We just exited. Not what we do. We do have about $43 million remaining and we have one residual problem loan that we're working to resolve 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.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

How much decline, how much even --

Richard U. Newfield -- Chief Risk Management Officer

I think $12 million year-to-date, it's pre-enabled percentages in a rundown mode. Other industries, I mean, real estate. Look, I guess I am [indecipherable] 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, you know, 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.

Tim O' Brien -- Sandler O'Neill Partners -- Analyst

Thanks for the color, guys, I appreciate it.

Richard U. Newfield -- Chief Risk Management Officer

All right, Tim.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Hey, thank you for the questions.

Operator

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

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Hi, Nathan.

Aldis Birkans -- Chief Financial Officer and Treasurer

Hi, Nathan.

Bob Shone -- Piper Jaffray -- Analyst

Good morning, it's Bob on for Nate.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Hi Bob.

Bob Shone -- Piper Jaffray -- Analyst

How you guys doing?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Well, good morning.

Bob Shone -- Piper Jaffray -- Analyst

I just wanted to touch on, 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 where you may be excited about in the second half '19 and in the 2020?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Right. Well. You know what -- 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 were really pleased with our newest team in Salt Lake City and in Kansas City, and that brought our Overland Park market. We -- look, we see increasing momentum and we just look -- so 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've heard Aldis say, maybe I'll reemphasize it, is that, you know, 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?

Richard U. Newfield -- Chief Risk Management Officer

Agree with what you said.

Aldis Birkans -- Chief Financial Officer and Treasurer

Exactly, yeah.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Bob, does that help or --

Bob Shone -- Piper Jaffray -- Analyst

Yeah. No --

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Sorry. The one question we didn't answer is you asked about next year. And, you know, I'm just not ready to get that far out over my skis. But I appreciate the question.

Bob Shone -- Piper Jaffray -- Analyst

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

Richard U. Newfield -- Chief Risk Management Officer

Sure, Bob, this is Rick. So, I mean, let me start just to be clear and may be I've alluded to this, we don't see any systemic issues see this as a one-off. It's a C&I loan that came over with the People's 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.

Aldis Birkans -- Chief Financial Officer and Treasurer

I'll just jump in here and remind that when we acquired People's Bank at that timing mark 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 of that mark still remaining and still yet to be accrued through our financials and we view that as basically a protection against this loan and anything else that may come up.

Richard U. Newfield -- Chief Risk Management Officer

And maybe Aldis just one other point on that is that when I look at the rest of the acquired People's loans and those are from marks, we've worked through problems at better than the original expectations. Again, back to your point of cover, good point.

Bob Shone -- Piper Jaffray -- Analyst

Awesome, thank you. I'll step back.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yeah, you bet. Thank you, Bob. Appreciate the question.

Operator

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

Gordon McGuire -- Stephens Inc -- Analyst

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

Aldis Birkans -- Chief Financial Officer and Treasurer

Yes, sir.

Gordon McGuire -- Stephens Inc -- Analyst

So that seems a little bit light to me. Running year-to-date, it seems like just if you match or did the year-to-date you should be getting $75.5 million. Is there something that I'm missing?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

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

Aldis Birkans -- Chief Financial Officer and Treasurer

So couple things. One is we are starting quite well off in mortgage production and gains on sale here in July. How long that lasts? It's hard to predict. So we are trying to be realistic, relatively looking how year ended last year in the fourth quarter.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

I keep hearing the word tempered.

Aldis Birkans -- Chief Financial Officer and Treasurer

The other component to be not counting that we did benefit than the first half of the year. We are not counting on those swap fees in the second half of the year and that does add up to --

G. Timothy Laney -- Chairman, President and Chief Executive Officer

And that is real.

Aldis Birkans -- Chief Financial Officer and Treasurer

$1 million or so.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

I mean, the swap fees, were that back to repositioning balance sheet. That's everyone's pack but look, impact but at this point or not, 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 picked up in our fee income out of our consumer bank in general. And so I guess if there's a temperance sets it's been somewhat concerned about just the general volatility in the market and where the economy is going. But my goodness, based on -- 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 all this is cringing. I wish you could see them. But I'll leave it at that.

Gordon McGuire -- Stephens Inc -- Analyst

Okay, so there wasn't anything unusual this quarter in the mortgage like unusual pricing or anything that we've done?

Aldis Birkans -- Chief Financial Officer and Treasurer

No, no. It's all volume driven pickup.

Gordon McGuire -- Stephens Inc -- Analyst

Okay, great. Thank you.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yeah. Thanks for the question.

Operator

Your next question comes from the line of Tim O'Brein with Sandler O'Neill Partners. Your line is open.

Tim O' Brien -- Sandler O'Neill Partners -- Analyst

Hey, one follow on. Just you guys mentioned adding a lot lower swap fees this quarter. So how much in additional fixed income loans to that had in the portfolio in the quarter? It's just the CREP's $41 million?

Aldis Birkans -- Chief Financial Officer and Treasurer

No. I would characterize it in the past and quarters before and year. Last year, we were adding about 65% to 70% of new loan originations would have been in variable rate loans.

Tim O' Brien -- Sandler O'Neill Partners -- Analyst

Yeah.

Aldis Birkans -- Chief Financial Officer and Treasurer

This quarter it was around 50% -- 55%, 50% to 55% was variable.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

You know the dollar amount of money, the incremental dollar amount.

Aldis Birkans -- Chief Financial Officer and Treasurer

We can follow back up with you Tim --

Richard U. Newfield -- Chief Risk Management Officer

It would be about $150 million.

Tim O' Brien -- Sandler O'Neill Partners -- Analyst

150 or 115?

Aldis Birkans -- Chief Financial Officer and Treasurer

150. Right. We had about $290 million loan production this quarter. Half of that was fixed. Half of it was variable.

Tim O' Brien -- Sandler O'Neill Partners -- Analyst

Awesome. Thanks for the call. Appreciate it.

Aldis Birkans -- Chief Financial Officer and Treasurer

You bet. Tim.

Operator

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

G. Timothy Laney -- Chairman, President and Chief Executive Officer

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

Aldis Birkans -- Chief Financial Officer and Treasurer

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

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Thank you, Aldis. I appreciate that. As I said before, we really are pleased with our first six 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.

Aldis Birkans -- Chief Financial Officer and Treasurer

Thanks.

Operator

And this concludes today's conference call. If you would like to listen to the telephone replay of this call, it will be available beginning in approximately two hours and will run through August 6th, 2019 by dialing 855-859-2056 or 404-537-3406. And referencing the conference ID of 7492217. [Operator Closing Remarks]

Duration: 40 minutes

Call participants:

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Aldis Birkans -- Chief Financial Officer and Treasurer

Richard U. Newfield -- Chief Risk Management Officer

Unidentified Participant

Gordon McGuire -- Stephens Inc -- Analyst

Kelly Motta -- KBW -- Analyst

Tim O' Brien -- Sandler O'Neill Partners -- Analyst

Bob Shone -- Piper Jaffray -- Analyst

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