National Bank Holdings Corp (NBHC) 2012 Q3 法說會逐字稿

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2012 third-quarter earnings call. My name is Brent, and I will be your operator for today. At this time, all participant lines are in a listen-only mode. We will conduct a question-and-answer session following the presentation. As a reminder, this conference is being recorded for replay purposes.

I would like to remind you that this conference call will contain forward-looking statements, including statements regarding the Company's loans and loan growth, deposits, strategic capital, potential income streams, gross margin, taxes, and noninterest expense. Actual results could differ materially from those discussed today.

These forward-looking statements are subject to risks and uncertainties, and they are disclosed in more detail in the Company's most recent filings with the US Security and Exchange Commission. These statements speak only as the date of this call, and National Bank Holdings Corporation undertakes no obligation to update or revise the statements.

It's now my pleasure to turn the call over and introduce National Bank Holdings Corporation's President and Chief Executive Officer, Mr. Tim Laney.

Thank you, Brent. And good morning and welcome to National Bank Holdings' first public earnings call. This morning, I'm joined by our Chief Financial Officer, Brian Lilly, and our Chief Risk Officer, Rick Newfield. Brian is going to be covering our operating results for the third quarter in detail, so I'll quickly cover some highlights.

During the third quarter, we were pleased to achieve a key corporate milestone with the completion of our IPO and the listing on the New York Stock Exchange. Adjusting earnings for one-time expenses related to the IPO, we produced net income in the third quarter of $0.06 per share versus $0.05 per share in the second quarter.

During the third quarter, we also successfully integrated our last acquisition onto our single bank operating platform. We grew our organic loan production for the seventh consecutive quarter, and we lowered our cost of deposits another 10 basis points. Before turning you over to Brian, I'm pleased to report that our Board has approved both a dividend program for our shareholders as well as a share repurchase program.

Brian?

Thank you, Tim, and good morning, everyone. As Tim shared, we earned an adjusted net income of $2.9 million in the third quarter, which equals $0.06 per diluted share. It was good to continue quarterly progress towards our long-term financial goals. On an adjusted basis, the return on tangible assets equaled 34 basis points.

Within the loan portfolio, we realized two key goals during the quarter with the growth of the strategic loan outstandings, and secondly, the decrease of the nonstrategic lows, while maximizing returns. Strategic loans grew $40 million or 15% annualized to end the quarter at $1.1 billion, representing 56% of total loans outstanding. The increase was driven by organic loan growth, as we increased production for the seventh consecutive quarter to $128 million, with all loan categories showing increased production. It is great to have the progress, but as we have shared, we have the capacity and are focused on doubling this quarterly total.

The credit quality of this strategic portfolio continues to be excellent, with only 0.4% as nonperforming loans. The nonstrategic loan portfolio decreased $85 million to end the quarter at $852 million. The decrease reflects our strategy of exiting adversely rated and other nonstrategic clients. We have reduced this portfolio 28%, or approximately 9% quarterly since the first of the year. An excellent indicator of our focus on maximizing the returns on these credits is the additional pickup in the accretable yield, both in the quarter and life to date.

We continue to make progress with our strategy of growing transaction deposits, which now represent 55% of total deposits, a 10 percentage point improvement from the 45% at year-end. The important client relationship category of average noninterest-bearing demand deposits grew 8.5% annualized, as we added client relationships and realized higher deposits per account.

The average time deposits decreased $235 million during the quarter, as we continued our strategy of only retaining those acquired clients that were interested in developing a banking relationship, inclusive of market rate time deposits. Recall that we acquired problem banks that used high rate time deposits as a source of funding. We are pleased to be retaining approximately 62% of these balances. Our strategies worked to decrease our cost of deposits 10 basis points from the second quarter to 0.59% in the third quarter.

Net interest income for the third quarter totaled $49.5 million, decreasing $2.4 million or 4.7% from the prior quarter. The decrease is primarily driven by a 3.8% reduction in the average earning assets, as we successfully exited nonstrategic loans and slightly reduced the investment portfolio.

In addition, the third quarter's net interest margin equaled 3.92%, representing a narrowing of 8 basis points from the prior quarter. The narrowing of the margin was primarily due to lower reinvestment yields for the investment portfolio, coupled with a decrease in the yield for the non-310-30 loans, as we received fewer prepayments during the quarter, thereby decreasing the accelerated recognition of acquisition discounts.

Credit quality continues to trend favorably. As you know, we believe that it is best to understand our credit quality and the provision for loan losses, along with the loan portfolios of 310-30 acquired loan pool accounting, and all other loans labeled as non-310-30 loans.

We completed the quarterly remeasurement process for the 310-30 acquired loan pools and picked up net economic value of $11.1 million. The improved cash flow forecast of the 310-30 loans resulted in a favorable net transfer to accretable yield of $14.8 million, while only recording, through the provision for loan losses, impairments of $3.7 million.

The favorable third-quarter results brings the life to date net increase in the economic value of the 310-30 loans to $61.7 million. The non-310-30 loans also experienced positive credit quality trends. These loans are primarily comprised of acquired non-310-30 loans, as well as all originated loans. Within this portfolio, the nonperforming loans improved to 3.9% at quarter end, versus the 5.4% at the end of the second quarter. The nonaccrual loan component of this ratio was relatively stable with the prior quarter at 2.3%. The improvement was driven by a reduction in the accruing TDRs as we exited two large commercial real estate credits.

Net annualized charge-offs for the non-310-30 loans were 51 basis points for the third quarter. The allowance for loan losses attributed to the non-310-30 loans was 1.07% as of September 30, as a provision for loan losses of $1.6 million covered net charge-offs and provided for new loan growth.

Within noninterest income, we were pleased with service charge and bank fee income growth over the second quarter of 12% annualized. Some of this growth is seasonal, but the underlying trends and client acquisition has been positive.

The other FDIC loss share income line item provided the largest quarterly variance, decreasing $2.6 million from the second quarter. This line item reflects the FDIC sharing of covered expenses, gains/losses on covered OREO, and changes to the clawback liability. The primary driver of the variance was a fair value charge that increased the FDIC clawback liability $1.9 million, due to the favorable actual and projected loss experience on the covered assets.

Operating expenses were flat quarter-to-quarter after adjusting for the IPO-related costs, and the problem loan and OREO cost variances. As you know, the costs associated with the process of problem asset resolution will fluctuate, depending on the timing of problem loans and OREO exits.

We continue to see opportunities to lower expenses in the long run -- not just problem asset expenses, but also professional fees. These two categories accounted for $8.4 million of the third quarter expenses and $27.4 million for the first nine months of 2012.

Capital ratios remain strong, improving slightly from the second quarter. Given the slight decrease in total assets, we now have approximately $375 million of strategic capital to deploy. The tangible book value per share ended the quarter at $19.30, increasing over the second quarter. And we are very proud to have grown tangible book value per share since the beginning of operations while building the franchise.

The common convention in the industry is to add the value of the accretable yield to the tangible book value per share. The value of the September 30 accretable yield balance on the 310-30 loans of $149 million would add $1.73 after tax to the tangible book value per share.

The more conservative methodology that we use values the excess yield, and then considers the timing of the accretable interest income recognition over time. Under this more conservative methodology, the value of the accretable yield would add $0.56 to our tangible book value per share, or $19.86.

I am very pleased to share that the Board has approved, on Wednesday, the initiation of a $0.05 quarterly dividend. As we have indicated, we intend to target a payout ratio of 25% over time. In addition, our Board approved $25 million for share repurchases to potentially take advantage of the market valuations of our share price. It is important to keep in mind that we are very committed to deploying our excess capital and growth initiatives; but occasionally, the market may present opportunities to add to shareholder value through share buybacks at prices discounted to tangible book value.

Let me add one last point for your modeling. The tax rate in the third quarter was impacted by the non-tax-deductible nature of the IPO expenses, but the adjusted results reflected a 39.2% tax rate, which was consistent with the first six months.

Tim, that concludes my comments.

Thanks, Brian. Looking ahead, we remain very optimistic about our opportunity to deploy capital and its strategic acquisitions. Our pipeline of opportunities is both attractive and actionable. As demonstrated by our track record, we'll remain focused on executing disciplined acquisitions in our target markets that create meaningful value for our shareholders.

We remain very positive on the markets where we do business. They continue to outperform the national averages, and we're well-positioned to capture our fair share in these markets. Each week, we make progress toward realizing the full potential of our existing banking center network and our commercial banking teams. We now have the capacity to generate over $1 billion of annual loan fundings, and we're encouraged by our progress toward that potential here in the third quarter.

We're also pleased by the growth of noninterest-bearing deposits and the improvement in banking fees, both which demonstrate progress toward realizing the full potential of our Company and the markets where we operate.

Brent, I'll pause here and ask you to poll our listeners for questions.

(Operator Instructions). Brian Zabora.

A question on your loan production. Can you give us a sense of what the split was between your Colorado and Kansas City footprints?

The -- it certainly is dominated by the Kansas City -- call it about a two-thirds/one-third. But the good news from that is, as we shared for the first six months, Colorado was just going through the integrations and wasn't producing -- really, covering its runoff in the production. For the quarter, it was able to cover the runoff with new production. And it's good to see the bearing of the fruit of the investments we've made in that portfolio. And there certainly is more to come.

On a month-to-month basis, Brian, if you compare first-year performance of our Colorado operations to first-year operations in Kansas City, Colorado is actually ramping up faster than what we saw in the first year of Bank Midwest or our Missouri operation. So we're encouraged here.

Great. Maybe just a question on expenses. I saw occupancy was up a bit in the quarter. Is that a good run rate? Or was -- is there anything involved in the transition, as far as putting everything onto one platform as far as any costs in that line?

The third quarter is going to be a better run rate, as what you saw with the first six months and nine months was some settling with the FDIC, to get those -- all assets and all those pieces in place. So you'll see the third quarter more of the run rate.

Great, all right. Thanks for taking my questions.

Thank you, Brian.

Matt Olney, Stephens.

Hey, on the organic loan growth, it looks like you guys made some good progress on the originations. Can you provide some commentary as to where you are on that initiative, and eventually where you want to be? And then second part of the question is, the runoff of non-core loans still outpacing the addition of core loans. How close are we to inflection point to seeing that offset each other?

You want to begin, Brian, and then I'll pick up and talk a bit how we see this unfolding?

Well, maybe I'll start with your second question, Matt, as we've talked about that. That's a 2013 crossover, as we see it. We're aggressively moving the nonstrategic loans. You know that there is some time frames with the FDIC that we want to meet, and certainly, there's opportunities to realize that economic value.

We've got a great team on the ground here working through those, and so we're not managing that pace to slow down at all. It's -- when you can get rid of a problem loan, do it. The focus is certainly on the new loan production, the first part of your question.

And as we've shared, the per cap -- the capacity that we have in the Company is in excess of $1 billion. And if you just straightlined that, that's over $250 million a quarter. That's why my comment -- you know, we're real pleased with the $128 million, and even Tim's comment, but we have a capacity to get to bigger. And that's really our focus, is to get it to that level.

You know, and Matt, I would simply add that we break this down into what you might think of as micro-segments or micro-plans. And when all is said and done, what we plan, what we're goaling for and ramping up to is a very reasonable target of $4 million a year in annual average production per banking center, and average annual loan production of approximately $15 million per commercial banker.

As you know, we have roughly 100 banking centers. We have roughly 50 relationship managers. And what we're monitoring is the progress towards those average targets. And if you do very simple math, that will show you that we're positioned to actually eventually move even beyond the $1 billion of production.

But when you think about our two -- and we do think of it this way -- we think about our strategic loan portfolio, which we intend to grow with client relationships, and really the acquired troubled portfolio, troubled loan portfolio, we very much think of as an investment portfolio; a deeply discounted portfolio that we manage for yield and return.

And really, what we've modeled and looked at is a three-year period where we have the benefit of accretable yield almost as air cover, providing revenue and income while we ramp up this organic loan production over this next one to three years. And again, that's why we're so intensely focused on that quarter-to-quarter ramp-up in production, because long story short, moving to approximately $1 billion in annual production is really the magic number.

Of course, that requires us to continue to be very focused on bringing down our cost of deposits, which we're doing; managing our expenses, which we're very focused on; and then that's where you start to put this Company in a position to provide very attractive returns for shareholders.

Okay, that's very helpful. And then, secondly, can you just remind us where you are in the hiring process of commercial lenders today versus where you ultimately will be?

Yes, you know, the good news is we've got the 50 bankers in our run rate today. I will tell you that we continue to work with those bankers to ensure we've got the best possible bankers on the ground. We have been building out some specialties that take advantage of opportunities in the markets where we do business. Two good examples would be agriculture and energy.

And while we have caps on how much exposure -- loan exposure -- we will permit for any sector, when we begin to look at a specialized energy, like energy or agriculture, we understand that if we're going to be successful in those industries, we have to have specialized bankers that understand that space.

And so that has meant -- the implication has been that we have replaced a number of our general bankers with specialty bankers. And you could expect some of that to continue. But the good news is we've got the number of bankers we need to hit these production levels in our existing run rates.

Thank you.

(Operator Instructions). Christopher McGratty, KBW.

Brian, you mentioned that you're retaining 62% of CDs maturing. I'm just wondering what percentage of those customers are renewing in CD products? And where are you offering new CDs?

We -- that 62% is primarily going back into the CDs, although some of that is making its way into money market accounts. And our incremental rate that we're bringing CDs on is currently about 50 BIPS, actually just a hair below that on a monthly basis, when you weight all the maturity structures we have out there.

Okay, thanks. And now that the IPO process is behind you, have you noticed any changes in your conversations with potential M&A targets?

Look, I can tell you within a week of having closed out the IPO process, we has reengaged in conversations and diligence with a number of potential interesting partners. And I can tell you that, quite frankly, given where our stock price is trading, it doesn't represent the kind of currency that we're excited about using in a transaction. So the conversations are very much focused on the idea of a partnership, the idea of doing something together, with the resulting company creating value that would create the real win-win for both the buyer and the seller.

Thanks, Tim. And just last one I had. Could you guys remind us of your financial targets for M&A transactions? Just how you're thinking about EPS accretion versus IRRs versus tangible book value earnbacks?

You know, every situation is unique. I think it's important to begin with the point that we are intentionally focused on transactions that would be strategic in nature, complementary to our existing markets, that would help us continue to build franchise value in the two areas where we do business. And we tend to look at that three to four-year payback range as a reasonable range in this market for making the right transaction happen.

And again, I think all you have to do is look at our history and discipline around structuring deals that create attractive returns. We still think the market offers up those kind of opportunities.

And just as a reference point, as we speak today, in our two markets, we have a combined 36 institutions with Texas ratios greater than 100% that represent total assets of just under $20 billion. And we believe those represent very interesting opportunities. And again, we believe there are also a number of unique open bank transactions that would be extraordinarily complementary, if we could structure an arrangement that truly represented a partnership in the way we think about creating long-term value.

Great. Thanks for taking my questions.

You bet.

Peyton Green, Sterne Agee.

I was wondering if you could comment a little bit. I noticed on the strategic loan growth that the ag and residential were particularly strong again, but that the C&I and CRE were still negative. Can you talk maybe a little bit about the production of those two segments relative to the ag and the residential, and when you would expect them to get a little more momentum?

So that clearly is the focus, Peyton. We've had great traction out of the residential real estate. You've heard our -- as we've talked about 15 is the new 30, and the ability for our banking centers to attract customers and bring referrals in on the refinancing, which continues to have a lot of legs.

But as you see, the commercial and related is where our opportunity is. And the Kansas City market is picking up, and we see tremendous opportunity in the Colorado market. And that's really the commercial bankers getting the product set, getting the activity that we want.

We have nice pipelines that are building. They're getting us to our levels. And it was good to see that we doubled, really, the production in the last quarter, but not nearly where we need to be. And that's what's going to get us to that [$250 million] a quarter that Tim was talking about.

Peyton, you know, I -- and I think you can -- or Brian can speak to it, if you can't see it, but we continue to be very disciplined in our core C&I business around protecting the balance sheet. We refuse to fall trap to pursuing business on loose terms or pricing that we don't think would represent attractive returns for the Company.

And we will pace ourselves accordingly. We're simply not going to fall into the game of chasing volume for the sake of chasing volume. I will tell you we track over the course of each year our production by segment. And what I can tell you that excites me is that our three highest segments of loan production in the C&I space are in this order -- number one, frankly, the $250,000 -- and these are small businesses, obviously -- loans of $250,000 or less; then $250,000 to $1 million total exposure; and then our real sweet spot is that $1 million to $5 million loan relationship, and our total exposure relationship.

And, quite frankly, we feel good about that. And what I keep coming back to is the markets where we do business. I don't think anyone expects to be superstars, but what we believe is that we can capture our fair share of these markets. And these markets offer up more than enough opportunity to reach that $1 billion production level, but do it in a way that's safe, sound, and generates reasonable returns for our investors.

Okay. And then just one follow-up. On the ag related, is that all land-based? Or is that includes some food service-related?

That's a great question. Rick, you want to -- our Chief Risk Officer, Rick Newfield.

Good morning, Peyton. That's really a combination of crop, livestock, and underlying agricultural land. And actually, probably -- and equipment -- and probably more balanced outside of land at this point.

Okay, great. Thank you very much for taking my questions.

Okay, Peyton. Thank you.

Matt Olney, Stephens.

Hey, just a quick housekeeping question for Brian. That $1.7 million impact on the non-IPO-related stock compensation, can you remind us what that is? And will that continue to impact quarterly results in the future?

I'm sorry, I missed the first part of that. You said the $1.7 million --?

The $1.7 million impact of non-IPO expense.

Oh, you're talking about the difference between the $4.9 million and the $6.6 million for the quarter in our stock compensation expense. The -- yes, that would be our normal amortization on a monthly basis. We typically run about $700,000 to a little bit less than that on a monthly basis for the amortization of the stock comp expense. And that would be our normal recurring level.

Okay, great. Thanks, Brian.

Thank you. And I'm showing there are no further questions at this time. I'll turn the call back to Mr. Tim Laney for his closing remarks.

Thanks, Brent. Well, again, hey, thank you for joining us for our inaugural public company earnings call. We appreciate your questions, your time, and have a good day.

Ladies and gentlemen, this concludes today's conference call. If you would like to listen to the telephonic replay of the call, it will be available beginning in approximately two hours, and run through 11.59 p.m. Eastern Time November 16th. You can access this by dialing 855-859-2056 in the United States or internationally at 404-537-3406, and use the conference ID number of 58781861.

The earnings release and an online replay of the call will also be available on the Company's website by visiting the Investor Relations area. Thank you. You may now disconnect.