National Bank Holdings Corp (NBHC) 2021 Q3 法說會逐字稿

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2021 Third Quarter Earnings Call.

My name is Nick, and I will be your conference operator for today.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would like to remind you that this conference will contain forward-looking statements, including, but not limited to, statements regarding the company's strategy, loans, deposits, capital, net interest income, noninterest income, margins, allowance, 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.

In addition, the call today will reference certain non-GAAP measures, which National Bank Holdings Corporation believes provides useful information for investors.

Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations section of www.nationalbankholdings.com.

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, Nick.

Good morning, and thanks for joining National Bank Holdings' Third Quarter 2021 Earnings Call.

I'm joined by our Chief Financial Officer, Aldis Birkans.

Our focus on growing share in attractive markets is translating into strong top and bottom line results.

I believe the quality of our new business pipeline will translate into attractive results through the fourth quarter and into 2022.

I'm very proud of our bankers engagement with our small- and medium-sized business clients and prospects, and I view this work as a differentiating driver of the momentum we're building in our business.

We continue to be prudent in our underwriting of credit risk, and we feel very good about the health of our loan portfolio.

On that point, I'll turn the call over to Aldis to cover the quarter in more detail.

Aldis?

All right.

Thank you, Tim, and good morning, everyone.

Thank you for joining our earnings call this quarter.

We are pleased to report third quarter's earnings of $19.8 million or $0.64 per diluted share.

This quarter was highlighted by record loan originations and exceptionally clean credible in capital deployment through an investment in Finstro Global Holdings as well as stock repurchases.

During the quarter, we also thoughtfully improved the company's balance sheet through the sale of the majority of our mortgage servicing lines.

I will cover these items in more detail later.

But first, let's address our loan growth.

Third quarter's loan fundings were a record $413.3 million.

As a result, we grew our core loan book during the quarter, a solid 16.5% annualized.

The loan growth was broad-based with all asset classes and geographies contributing to the loan balance growth.

Furthermore, we continue to be very pleased with our bankers' business development efforts, which are generating strong pipelines across all of our markets.

At this time, we project to exceed our original guidance for loan growth from the prior quarter and expect a near double-digit annualized growth for the fourth quarter of 2021 again.

With regards to the Paycheck Protection Program loans, we had $76.8 million outstanding as of September 30, 2021.

The remaining PPP loan deferred revenue balance is $2.4 million, and we expect most of this fee to be recognized in the fourth quarter as the forgiveness efforts continue.

Turning to deposits.

This quarter, we continued the strong growth in deposits with average transaction deposits increasing 5.2% annualized.

Our cost of total deposits decreased another 3 basis points this quarter to a low 21 basis points.

Strong deposit growth benefited our average earning asset base, which similarly grew $62.5 million.

And as we discussed during the last earnings call, we have started deploying cash into higher-yielding loan balances.

The resulting fully taxable equivalent net interest margin during the third quarter expanded 11 basis points to 2.93% and the excess liquidity still had a 36 basis point dilutive impact on our margin.

This quarter's fully taxable equivalent net interest income was $48.9 million and included $2.6 million of PPP loan fees.

Stripping out the PPP loan fees, our linked quarter core net interest income grew 19.8% annualized.

Our asset quality remained strong with another quarter of solid reductions in nonperforming loans and nonperforming assets.

NPAs decreased 9.6% this quarter and are 27% lower than 1 year ago.

Net charge-offs for the quarter were just 2 basis points annualized.

These excellent credit trends, combined with improving economic forecast projections from Moody's, resulted in a reduced calculated reserve and was sufficient to support the new loan growth and therefore required no provision expense this quarter.

The resulting ACL to total loans, excluding PPP, was 1.13% at quarter end.

Total third quarter's noninterest income was $28.5 million.

Our client engagement for both consumer spending and business account activity continue to expand with total service charges reflecting 5.5% growth this quarter over the third quarter of last year and bank card fee revenue increased 12.2% over last year's third quarter.

We also continued to execute on our banking center efficiency initiatives, which resulted in a sale of an additional banking center during the quarter.

As a result, other noninterest income benefited from an $800,000 deposit premium gain this quarter.

Additionally, this quarter, we sold approximately $1.3 billion of our mortgage servicing portfolio.

With high mortgage production volumes, this portfolio have more than tripled since the beginning of the pandemic and this was a strategic move to reduce the mortgage servicing asset risk.

As a result of the sale, we reduced our intangible assets by approximately $11 million in the realized, a $1.3 million gain.

The other key driver this quarter -- for this quarter was better mortgage revenue was the margin recovery as compared to the second quarter of 2021.

For the remainder of the year, we project our total noninterest income to be in the range of $19 million to $21 million.

As always, large swings in long-term interest rates could impact both our mortgage production and this projection.

Turning to expenses.

This quarter's noninterest expense totaled $51.3 million and was elevated due to a couple of nonrecurring items.

During the quarter, we incurred $2.4 million in transaction-related expenses for the Finstro investment as well as an $800,000 write-down on 1 OREO property related to a prior bank acquisition.

For the fourth quarter, we expect noninterest expense to return to the range of $45 million to $46.5 million, consistent with our core run rate.

With regards to capital, this quarter, we invested $20 million in Finstro Global Holdings as part of our previously announced strategic partnership.

This investment resulted in BH owning a 33% noncontrolling interest in the company.

Additionally, during the quarter, we repurchased $19.4 million of our stock.

As a result of the stock buyback activity, the fully diluted share count for the fourth quarter -- for the fourth quarter is projected to decrease to around 30.8 million shares.

Our capital ratios continue to remain strong at 10.43% Tier 1 leverage ratio and 14.57% common equity Tier 1 ratio.

And finally, despite the stock buyback activity, our tangible book value per share increased $0.19 this quarter to $24.20.

And with that, I will turn it back to you.

Thank you, Aldis.

I want to thank all of our teammates for their contribution to our strong third quarter.

On our last earnings call, I said I believe we were poised to deliver record levels of new relationship growth and loan production and our team delivered.

As we look ahead, we feel very good about the high level of business activity in our markets and our company's potential for future growth.

Now speaking of future growth, we believe we're on the verge of creating a comprehensive digital financial ecosystem capable of providing small and medium-sized businesses with unparalleled access to a full range of banking services and blockchain payment alternatives.

We're building a digital marketplace of financial services within the bank regulatory framework that we believe can be a game changer for small- and medium-sized businesses across the country.

You can be certain that we'll be sharing more along the way.

And on that point, Nick, let's open up the line for questions.

(Operator Instructions) And our first question comes from Brett Rabatin with Hovde Group.

I wanted to first ask, Tim, on your last point about the ecosystem and the fintech space.

Can you maybe give us, if possible, any thoughts on revenue and how you see that playing out either in the near term or over a multiyear period?

And is it more creating an ecosystem to add new clients?

Or do you expect this to be more of a banking as a service kind of platform that is driving specific fee revenues in particular?

Yes.

I'll begin with last question you touched on there, to be clear.

We are not looking at playing in the banking as a service arena.

I mean there could be one-off elements where we're doing that on an experimental basis.

But ultimately, our view is that the banking as a service play will be commoditized in.

We're on the other hand, very focused on the development of comprehensive relationships with small- and medium-sized business operators.

And to be even more clear, we believe across this country, there is opportunity to engage with minority groups to engage with a broad range of small business owners, in particular, in a way that will give them access to the business or the bank regulated system that they've not experienced today.

So I would tell you, as we talk about this ecosystem, we think about it, not necessarily on a proprietary basis, we think about it again more as a marketplace where we'll be working with best-in-class partners to deliver through this ecosystem a full range of banking services.

And so if you really think about it, the way we think about it, there are 4 legs to that business.

The first is obviously, digital lending capabilities.

And we tend to think about those lending capabilities in 3 arenas, addressing trade finance or working capital needs, and that's a key role that Finstro will play.

And again, we're fortunate to have been able to partner with Finstro who had a proven track record in Australia, and they've brought their company to the United States.

I suspect we'll be working to deliver SBA-related products to address commercial real estate owner occupied commercial real estate, where small business owners, medium-sized business owners want to own and invest in their factories and their business places.

And then we'll be talking about the addition to digital equipment finance and other capabilities that basically start to check the boxes around the primary needs of small- and medium-sized business owners.

The second leg relates to depository and treasury management services, we think a real differentiator between nonbank players and doing this within the regulatory framework is obviously the ability to deliver these services on an FDIC-insured basis, which we think is huge.

The third leg is about delivering comprehensive information dashboards when we think about real problems to be solved.

One for many business owners that don't have the benefit of having a CFO or a finance offices that ability to understand where they are on a cash flow basis on a day-to-day basis.

And we believe we're working with the right partners to deliver that kind of information in this ecosystem to these businesses and reduce anxiety in these business operators' lives.

And really, the fourth leg is about leveraging blockchain to reduce cost of payments while improving the quality of information related to those payments.

I'm not going to go much deeper, that maybe even more than you expected.

But if you start to put those 4 legs together and think about where this can take us on a literally coast-to-coast basis.

I think it's premature to be talking about incremental earnings for the first quarter of 2022.

Having said that, I believe there will be elements of this ecosystem that will begin to deliver incremental profitability next year.

That's very helpful, Tim.

There was a lot of detail, and it was really interesting dynamic that you've got.

I guess the other big question I wanted to ask was just around the loan growth dynamic versus the margin.

And I'm just curious, it would seem like if you could continue this growth and deploy liquidity, use liquidity to fund loan growth, the margin should keep going up.

So all this I was curious if it would seem to you like the margin can continue to have an upward tenor.

And then I just wanted to ask him on the loan growth side.

Is this a lot of new clients driving this growth or is this a more existing clients drawing on lines of credit?

Yes, I'll take the margin first deal.

So you're absolutely right, as we deploy the cash and the loans that only will be accretive to the margin.

One item that is benefiting all banks these days not outstanding, which is the PPP loan fees.

So if you take that out, on linked quarter basis, we grew $2.2 million, almost 20% annualized in terms of net interest income, and that is driving the margin expansion.

But again, the PPP loan fees is a shortlist of benefit, which we obviously take but we're not counting on.

So you need to adjust for that in that calculation.

But the core margin is absolutely expanding.

On the loan growth prospects, look, I could not be more proud of our teams and their engagement with both existing clients and prospects.

I tend to fall in that camp of people who believe that you may be able to maintain relationships over the telephone and Zoom and other capabilities, but it's difficult to develop new relationships without being face-to-face.

We've been back in our offices since July of last year.

Of course, our frontline banking center teammates never left their offices.

But I think the fact that we have our business banking and commercial banking officers out in the marketplace, engaging with business operators has been a real game changer for us.

And again, I'll remind you that we were seeing the new prospective business in the pipeline as we move through the first half of this year.

We're really watching the business and the balance sheets of those businesses through the first quarter as they begin to deliver their annual balance sheets and income statements to ensure that we liked what we were seeing and that the businesses had resumed operations accordingly, and we've had great success in winning new relationships.

And as I also suggested in my earlier comments, we feel very good about the pipeline as we look to the fourth quarter and in the '22.

Congrats on the results.

And our next question comes from Andrew Liesch with Piper Sandler.

Thank you for the detail on the fintech partnerships, very helpful.

Just a couple of questions here.

1 question here on the guidance on the noninterest income, the mortgage banking premium increased, but if you expect it to the total amount as you think come line to drop this quarter, is that just from lower volume here in this quarter months.

That's right.

So within that is certainly seasonal slowdown that we expect this quarter to take place in the fourth quarter as it typically does in the winter months.

So that's embedded in that mortgage guidance.

Also this quarter, just to repeat, the benefit from the $800,000 benefit from deposit premium on the sale of the banking center.

So that obviously is not competitive either.

So if you're looking at the linked quarter basis, that's the guidance.

Right.

Got it.

Then on the loan yields, just curious on the new production, where those were being added relative to, I guess, the core portfolio yield, excluding the PPP loans.

Right.

So if you look at our NIM table and look at the first line, which is originated loan FTE 4.01%.

That includes the benefit of the PPP.

If you exclude that, our originated loans are yielding about 3.87%, this last quarter, which was fairly flat to the prior quarter.

And our new loan originations came on at 3.9%.

So at or slightly accretive to the originated book as it exists.

Got it.

And with a lot of the growth being C&I are these variable rate loans?

It's a lot of variable rate loss.

I'd say it's about 50-50 type of mix between variable to fixed rate.

Excuse me, one more question related to the mortgage business and expenses.

If it's easy to parse out how much of the salaries and benefit plan was related to the uptick in mortgage banking revenue in the third quarter?

Yes.

Well, I'm not going to give you an exact answer, but I'll give you the guidepost that I typically talk to.

So if you take the gain on sale this quarter, back out the $1.3 million MSR sale benefit.

And then about 30% to 35% of the remaining gain on sale is usually our commission and variable type of cost associated with mortgage.

Andrew, I'll add, Andrew, I would add on to that last question.

I think it's an important one is that I give our residential banking team leadership and all this and his team a lot of credit for being very focused on bringing those variable expenses down as we see revenue coming down in the mortgage banking business.

And it's one thing to understand how commissions should naturally come down as closings go down.

The real art is bringing those other variable expenses down, and they've just done a remarkable job of managing those expenses accordingly, and you should expect that to continue.

And our next question comes from Kelly Motta with KBW.

Thanks, Tim, for all the color on the fintechs.

There's a lot more in there than I thought there would, and I'm definitely going to have to go back to the transcript for a second read.

But I wanted to ask a bit about deposits.

You rolled off the time deposits and kind of that balance -- increased balance sheet leverage has helped support some NIM expansion.

Just wondering how we should be thinking about the trajectory of deposits?

And if there's more kind of higher cost types of accounts that are left to be rolled off or if we should kind of expect an inflection in growth here in the maybe next quarter.

Any thoughts on that would be helpful.

Yes.

We continue to be laser-focused on adding relationships and operating accounts.

So that's the primary driver for us as we manage internally strategically our deposit growth.

Naturally, some of that where there are higher price time deposits that might be in one-offs that are rolling off from that were booked years ago coming off and we're just not chasing that rate, resulting in some of the time deposit book decreasing.

But for us, it's really building and expanding the relationship base behind it.

In terms of your question, where does that lead to the cost of funds and cost of deposits at the end of the quarter, a 21 basis points total deposit cost, I believe, we can get below 20% by end of the year as could this remix continues.

And then if I could spin in on capital, you were buying back stock this quarter.

Just wondering on thoughts for continued opportunistic buybacks and we got color to just spending on capital and some of the fintech investments that you had alluded to in past quarters.

Just wondering any updated thoughts on capital deployment, given you still have quite a bit of flexibility where you are right now?

Kelly, I think you hit on the right mindset there, which is we are, first and foremost, going to be opportunistic.

And we do think the flexibility we have enables us to really continue to look at our options.

When we think about the investments in both Finstro Global Holdings and Figure Technologies, it was really about our belief that these 2 partners represented key pieces to this puzzle we're putting together to create the ecosystem.

And I will share with you that this business will be known as to Unifi and more to come on that.

So as I referenced to Unifi, that is the ecosystem business we're building.

You can expect other partners that represent other key pieces of this puzzle to become a part of this where opportunities to invest will do so because we believe in the upside of what we're doing here, we believe in the upside in these partnerships.

And so you will probably see us less focused on, call it, the investment in the smaller community bank and more focused on what we believe is the future.

Having said that, we'll maintain optionality and should we actually discover the right opportunity in the coming months in the traditional bank space, we'll do that.

But we are in ongoing discussions with a lot of very smart people and partners that we think could be key in taking to Unifi from coast-to-coast and creating, again, unparalleled access for small- and medium-sized business.

So again, I think you hit the nail on the head.

We'll be opportunistic and we'll maintain optionality.

And our next question comes from Andrew Terrell with Stephens.

Maybe back on the margin really quickly.

It was good to see you leverage some of the liquidity this quarter.

I guess with the cash position still at, I think, around $700 million, $800 million.

I know the growth outlook feels like it's improved, but is it fair to think that you would still kind of build the securities portfolio from here?

Or any kind of update to the strategy there?

Yes.

On the investment securities portfolio, we added, around, maybe $100 million on a linked quarter basis.

I think it is where I would like it to be unless some outlook for loan growth or something else changes for now, we'd like to preserve the optionality on the balance sheet as well and not lock into a long duration or other type of high-risk asset and just keep the cash and deploy it in the loans.

Yes.

Understood.

It looks like with the 0 provision taken this quarter as well as just the strong balance sheet growth, you're fairly -- you're back, I guess, fairly close to day 1 CECL levels.

I guess moving forward, should we expect the provision line to just more closely match charge-offs and reserve for new loan growth or do you think there's room for the allowance ratio to move further down from here?

Well, as of today, we are fully reserved as the current conditions would indicate and for the total book.

So it's hard to predict where -- it will depend on where the outlook goes and where the credit trends, certainly, we always will have to cover the new loan growth as well as if there is any deterioration in the credit book.

But right now, I'm just not (technical difficulty) to predict where this may go from here because the Moody's projections are driving this quite a bit.

And if you look at the -- some of those forecasts today, some of them are indicating getting back to near 3% unemployment rate in not too distant future.

And so any low step back from there could drive the model change.

Okay.

That's good color.

I appreciate all this.

I appreciate the color on the ecosystem and the partnerships.

And our next question comes from Jeff Rulis with D.A. Davidson.

Yes, just really just a follow-up on a few of those topics.

The first being on the fintech relationship.

So I mean not to simplify, but if we're looking for kind of ROI on that investment, that's maybe the wrong way to look at it in the near term.

It's kind of staying relevant or being a leader in the business kind of cost of doing business and maybe those revenue synergies occur down the road.

As we get into that partnership or investment, is that what you'd kind of largely expectations in the short run here?

I think that's a reasonable summary.

I think that companies like Amazon when they started, and they didn't have the benefit of having a core engine like we have to continue to drive revenue and profitability.

And we certainly believe our core bank has a tremendous amount of upside and runway and will not be taking our eyes off it.

On the other hand, I get just as excited about the prospects to Unifi, as I did when we launched NBH some 11 years ago, and there were naysayers, so were saying it couldn't be done.

I think the way we think about the technology is we will strive with great discipline to avoid being drawn to the bright shiny objects and investing in technology just for the sake of playing in that space.

This is really about looking at problems that exists for small- and medium-sized business operators in this country today and believing we can use the tools, many of them happen to be technology, but we can use tools to put together a business that can solve those problems coast-to-coast.

And I think what's really also interesting about this is we think versus -- thinking about this business model and waiting for it to come together over a 5-year period or something like that, the architecture is such that we believe that there can be incremental contribution to earnings beginning as early as next year.

And that doesn't mean that the entire business model will be up and running, but there will be incremental elements of the model that we'll already be taking to the market and benefiting from.

Okay.

Appreciate it.

Aldis, did I miss a margin guide?

I may have in your prepared remarks, did you mention where you think the core margin is headed?

No, I did not specifically on the percentage terms, but really to kind of come back to driving impacts to the margin today that are one dilutive one accretive, right, the net -- the PPP loan fees, $2.6 million this quarter as well as the excess cash and earning asset base diluting the earning asset yield.

So if you back those out, the core margin is currently around [3.15% to 3.20 type of percent] margin, and we will look to build on that.

Fair enough.

Got it.

And then back to the loan growth and expectations sort of upticked in the -- obviously, in the third quarter and then as you're guiding for fourth quarter.

I wanted to kind of ask it a different way.

Is it -- do you think that's a little bit of a pent-up catch up to where you -- a strong second half, but then we enter '22, and you're back to sort of more normalized or is that -- like this uptick is sustainable and you really feel good about maybe a high single-digit sort of path in '22, and I don't mean to front-run kind of forecast there.

But just -- is this catch-up in the second half?

Or is it real emergence of growth that could carry in the new year?

Sorry, long-winded.

No, no.

It's an important question.

And I would just ask you go back and read the transcripts at year-end, at the end of first quarter, at the end of second quarter.

We did talk about the fact that we had our feet on the brakes certainly coming into '21 and waiting until the end of the first quarter.

And until we receive the financial information from the prospects and clients, we started to lean in in the second quarter.

We've seen the benefit from a hyper focus on market development on business development in each of our respective markets.

And I believe that hyper focus and engagement, as I said in my prepared remarks, will carry us strongly into 2022.

We are very energized around what we're seeing in our markets.

And again, we're fortunate to be operating in some of the better markets in the United States, but make no mistake, I couldn't appreciate our bankers more for their level of engagement, and it's making a difference.

I have 1 more.

I'm sorry.

The mortgage line, just a quick one, just for '22, is it safe to assume sort of NDA forecast quarter for '22 versus '21, would you expect to largely mirror that?

I think the answer is, yes, that's our starting point.

Now you have to come back and look at the -- again, back to Tim's comment of we are operating in the markets that are growing faster and certainly Colorado, Utah, Texas markets have demographically greater population inflow than some other parts of the country.

So we're benefiting from that one.

And secondly, the other component to be our volumes these days are back to 60%, call it, 65% purchase market, so which is our driving core behind our mortgage business as well.

So the NDA outlooks on that is important to incorporate as well.

Thank you.

And 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.

All right.

Thank you, Nick, and I want to thank everyone who attended this morning for your time and attention, particularly thank those who are investors in National Bank Holdings, we continue to be focused on creating strong total shareholder returns, and our commitment is to do everything that's prudent to continue a track record of delivering solid results.

Thanks, and have a good day.

And this concludes today's conference call.

If you would like to listen to the telephone replay of this call, it will be available beginning in approximately 4 hours and will run through October 25, 2021, by dialing (888) 203-1112 and referencing passcode 7577774.

The earnings release and 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.