National Bank Holdings Corp (NBHC) 2012 Q4 法說會逐字稿

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

I would like to remind you that this conference call will contain forward-looking statements including statements regarding the Company's loans, loan growth, deposits, strategic capital, potential income stream, gross margin, taxes and non-interest 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 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 the statements.

It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's President and Chief Executive Officer, Tim Laney. Thank you. You may begin.

Thank you, Sharon. Good morning and thank you for joining National Bank Holdings call to discuss our fourth quarter financial results. Today I'm joined by Brian Lilly, our Chief Financial Officer; and Rick Newfield, our Chief Risk Officer.

As detailed in our release, NBH generated $0.06 per share for the quarter and we realized our eighth consecutive quarter of growth in organic loan production. We grew our average non-interest bearing demand deposit balances 16.6% on an annualized basis and lowered our total cost of deposits to 48 basis points at year-end. Our net interest margin expanded to 409 basis points, driven by higher yields coming out of the ASC 310-30 loan pools and the lower cost to deposits. Credit quality remained very strong with net charge-offs on our non-310-30 loans running 27 basis points for the year. We did; however, experience higher problem loan and resolution our OREO expenses in the fourth quarter as we continued to aggressively address the remainder of the acquired OREO on our books. Finally, we ended the year with approximately $400 million of excess capital and we believe we're very well positioned to take advantage of intelligent acquisition opportunities in our markets.

Now I'll turn it over to Brian to discuss our results in more detail. Brian?

Thank you, Tim, and good morning, everyone. As Tim shared, we earned net income of $3 million in the fourth quarter, that's equal $0.06 per diluted share. As you saw in our results, we continue to make progress in building the organic growth capabilities of our franchise while working out the non-strategic assets at attractive returns. Within the loan portfolio, we are focussed on two key objectives, the growth of the strategic loan outstandings and the decrease of non-strategic loans while maximizing returns. Strategic loans grew $41 million, or 15% annualized, in the quarter at $1.1 billion and now comprises 61% of total loans outstanding. The increase was driven by organic loan growth as we increased production for the eighth consecutive quarter to $140 million. And in particular, our commercial loan category showed increased production. We are pleased with our progress towards achieving our goal of $1 billion in annual originations and we are positioned to continue steady progress in 2013.

The credit quality of this strategic portfolio continues to be strong with only 0.6% as non-performing loans. We had a very active and successful quarter exiting the non-strategic loan portfolio. These loans decreased $132 million, or 62% annualized, to end the quarter at $719 million. For the full year we have reduced this portfolio $470 million while realizing increased value as evidenced by the increases to the accretable yields.

I should note that our loan workout team is not just focussed on the low-hanging fruit as we have built tracking processes to ensure that we are addressing the more difficult credits. A key evidence point in the value pickup from our loan workout efforts is the accretable yield gains during 2012. The fourth quarter added $8.9 million in accretable yields against only $1.6 million in loan-pool impairment. And for the year the additions to accretable yield totaled $47.5 million against only $19 million of loan-credit pool impairments. We are very pleased with the balance between our organic growth and the results and pace of our problem credit resolutions.

In terms of the deposits, we continue to make progress with our strategy of growing transaction deposits, which averaged $2.4 billion in the fourth quarter, growing 4% annualized over the third quarter and now represents 48% of total deposits, up 13 percentage points improvement from the 45% at year-end 2011. The important client relationship category of average non-interest bearing demand deposits grew 16.2% annualized as we added client relationships and realized higher deposits per account. Quarter-end time deposits decreased $193 million due to 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 with the most recent retention over 40 -- excuse me -- over 70%.

Our strategy is focussed on client relationships have worked to decrease our cost in deposits to 0.48% and represented in 11 basis points improvement from the third quarter. For the full year, we decreased our cost of deposits over 40%, or 36 basis points. Net interest income for the fourth quarter totalled $49.6 million and we are pleased to report that it equaled the third quarter. The expansion of the net interest margins by 17 basis points to 4.09% for the fourth quarter was offset by the impact of a smaller non-strategic loan and investment securities portfolio. The margin benefited from our continued focus on lowering our cost of deposits and a 7 basis point higher yield on earning assets. The higher yield is entirely driven by the ASC 310-30 loan pools as the yield improved 115 basis points to 10.79% for the fourth quarter. The higher yield is reflective of the quarterly increases in the cash flow received and forecasted for these loan pools.

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 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 with 310-30 acquired loan pools and picked up net economic value of $7.3 million. The improved cash flows and forecasts of these loans resulted in favorable net transfer to accretable yield of $8.9 million while only recording to the provision for loan losses impairments of $1.6 million. The favorable fourth quarter results brings the life-to-date net increase in the economic value of the 310-30 loan pools to $68.9 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 non-performing loans ratio remains stable at 4%, whereas the total past-dues improved from 3.73% to 2.73%. In addition, we are very pleased that net annualized charge offs for these loans were 27 basis points for the fourth quarter, reflecting an improvement over the 51 basis points last quarter. The allowance for loan loss was attributed to the non-310-30 loans was 1.06% as of December 31 as the provision for loan losses of $1.1 million covered net charge-offs and provided for new loan growth.

Excluding the FDIC related income, non-interest income totalled $10.9 million and increased $1.5 million over the third quarter. The increase was driven by recoveries on assets previously charged-off. Our initiatives for banking related fees showed progress as we grew bankcard and gains on the sales of mortgages, whereas the typical seasonal decreases and NSF charges lowered the service charges for the quarter. Within the FDIC related income, we recorded an increase of $1.8 million in the negative accretion as the performance of the underlying covered assets improved with each quarter's remeasurement. Partially offsetting the increase in negative accretion is a $1.3 million increase in the recoverable expenses incurred during the quarter.

Operating expenses were flat quarter-to-quarter after adjusting for the third quarter IPO related costs and excluding the problem loan and OREO cost variances. As you know, the costs associated with the process of problem asset resolution fluctuates depending on the timing of problem loans and OREO exits. The higher fourth quarter OREO costs were driven by the higher sales and valuation activities as we were successful in selling $43 million in OREO properties. In fact, we worked out over $100 million of the day-one OREO balances. This is significant as, in many cases, these OREO properties were the most problematic. 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 $12.5 million of the fourth quarter expenses and $40 million for the full-year 2012.

Capital ratios remained strong improving slightly from the third quarter. We ended the quarter with $400 million of strategic capital to deploy using a 10% leverage capital ratio. The tangible book value per share ended the quarter at $19.17, decreasing $0.13 from the end of the third quarter. The driver of the decrease was the slightly higher yield curve as the pair value mark of the available for-sale portfolio decreased the equivalent of $0.12 per share from the end of the third quarter. A 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 year-end accretable yield balance on the 310-30 loans of $133.6 million would add $1.54 after-tax to the tangible book value per share. A more conservative methodology that we used valued the excess yield and then considers the timing of the accretable yield income recognition. Under this more conservative methodology, the value of the accretable yield would add $0.50 to our tangible book value per share, or $19.67.

I will close by noting that we were very pleased to initiate a quarterly cash dividend for our shareholders of $0.05 per share. Tim, that concludes my comments.

Thank you, Brian. Having closed out 2012, we've turned our full attention to 2013 and we're focussed on growing our loans organically and expanding our relationships with clients while maintaining a low-risk balance sheet. Investing our excess capital and smart acquisitions that will tangibly increase our franchise value; managing our excess capital, which could include the buying of shares; and last but certainly no less important, expense management.

On that note, we'll pause and take your questions.

(Operation Instructions)

Your first question comes from the line of Ryan Nash from Goldman Sachs.

Hello. This is Jared [Baker] (multiple speakers).

Hello, Ryan.

Hello, guys. This is Jared in for Ryan. On the M&A side, a big part of the story is obviously leveraging the $400 million of excess capital. You're about four months now post the IPO. Can you give us a sense of what you're hearing in your conversations as to why M&A is not seeing a big pickup yet?

Look, consistent with what we've said in the past, we chose our markets, in part, because of a large number of banks that we believe would benefit from partnering with us. We've been very active and diligent during the fourth quarter and continue to be active as we speak. But I should add that what we will not do are deals that fail to meet our risk in return hurdles. Quite frankly, the Board would turn its attention to buying in shares before we actually deployed capital into high-risk or low return acquisitions.

Having said that, as we sit here today there is a total of 65 banks with $87 billion in assets, 30 of which -- these are in our markets -- 30 of which have Texas ratios over 100. And I can't stress enough that our pipeline continues to be very strong and, in fact, we are very engaged in activities in our markets as we speak. It is probably also important to add that when we think about our own hurdles, or potential partners, we look at transactions that would be obviously accretive to ROA. We look at transactions that would have a reasonable pay-back period, a balance sheet that can be appropriately marked to address the existing risk on the balance sheet, and when all is said and done, we're looking at combinations that we believe will build tangible franchise value.

So the broader question, Jared, is across the country, why aren't we seeing more activity? We have been saying for a number of years on open-bank transactions there seems to be a spread between the bid and the ask. I can tell you we've had opportunities even here in the fourth quarter that just haven't made enough sense for our investors. We still have a number of others in a long queue that will continue to work. And we remain confident that we'll be able to deploy capital in our markets for attractive returns.

Okay. That's great. Maybe one follow-up. Turning from M&A to like your organic growth side and originations were up 9% this quarter. It looked there was some good growth on the commercial side. When you think about getting to that pace of $1 billion of annual originations, is that a late 2013 event in terms of the run-rate? And can you give us a sense of where you're seeing the most opportunities for growth? Thanks.

Maybe I'll answer that in reverse order. The opportunities are in both our markets. We're very excited with the pace of Colorado coming online and complimenting what Kansas City has already in place. We have our eye firmly focused on that $1 billion and we've shared with you the math to get there. One of the components, though, that does take time is to build that book of business that then can generate part of that production for you. So a lot of the production that you're seeing today are new clients. And as we get that book built, that will fuel that and drive to it.

As we have shared in some of the financials that we did for the IPO modeling, that was more in a 2014 getting to that level and a lot of progress getting there in 2013 as we build that book of business. That, then, throws off repeat business and compliments our new client acquisition strategies.

Thanks, guys.

Thank you, Jared.

Matt Olney from Stephens.

Good morning, gentlemen.

Hello, Matt.

The run-off of the acquired loans picked up quite a bit in the fourth quarter. How should we be thinking about the pace of those paydowns in 2013?

You know, we have asked ourselves and planned for that a couple of different ways. We definitely want to exit when the opportunities are there. And if you look at the trend that we experienced in 2012, we are running at about 10% a quarter for the first three quarters and then we picked up significantly here in the fourth quarter as a lot of activity came to fruition. I think we're going to be in that kind of range as we go forward.

We've said that the [loan] pools have about a two year life to them. Of course there is a tail to that. And so as you think about that burning off, we look at it in that kind of pace. Now, if there is opportunities to move quicker and create value, we'll do that. But it's -- I think the recent history is a -- is good as any gauge for what we're going to see going forward.

Okay. That's helpful. And then secondly, can you talk about the hiring process of your relationship managers and how many bankers you have in place today and remind us of what that goal is again?

I'm sorry. I missed the first part of that, Matt.

I'm sorry. Where you are in your hiring process of RM's -- where you're at today and remind us where you want to be?

Well we're -- as we shared with you in the past, 58 commercial bankers is the number that we have firmly focused on between our two markets. And certainly as Tim has shared, we have been in the process and continue to upgrade that talent. And there is a real good core group that is developing in there and building that market share for us. And then the other compliment to that is our banking centers where we have that goal of $4 million -- annual goal of production against our 100 million -- excuse me, our 100 banking centers that we have in place. And those two are the -- not to over simplify but that is the engine that we're focused on to generate our production.

And would simply stress that it is not about hiring lenders, it is about hiring bankers that really are focussed on delivering the full range of our services to clients. And as a result, driving solid growth and transaction deposits and other fee-related business. And we've -- we feel very good about the continued ramp-up of quality of our -- both our commercial bankers and our banking center teams.

Great. Thank you, guys.

Thank you, Matt.

Brian Zabora from Stifel Nicolaus.

Thanks. Good morning. A question on the other real estate owned expenses. How much of that were -- was loss on sales and how much of that was valuation adjustments?

It is a little bit of both and there was some valuation -- call it 50-50, Brian, for ease of math. And certainly you can appreciate the size of the $43 million that took place in the quarter. And that has reduced our balance to that $86 million. Within that $86 million we only have $33 million of the original day-one OREOs, which has been a source of much of that work. So as we shared, it has been lumpy. We're pleased with the progress and the returns we're getting, knowing that some of those were hand valuations and we've all gone through those sales as time has gone on here. But we feel like we're in a really good place.

Great. Do you have more appraisals done year-end? Or is there any, I guess, seasonality to the timing of appraisals?

There happen to be -- that's very insightful of you, Brian -- we closed, of course, Community Banks of Colorado in the fourth quarter of 2011 and our policies do require annual appraisals. So there was a big chunk of those that came up for the first time that created some of that volume. But really, we were really focused on getting that $43 million out that we were successful with.

Great. And then on the loan pipeline, how does it look maybe at the end of fourth quarter versus the end of third?

I think both of our markets -- we have monthly business reviews with our teams and they continue to generate good prospects and add to the list. And it's really encouraging to see as that builds -- so as we're booking the business, we're adding to the pipeline even quicker to get to our goals. And so good, good prospects that are out there. And we're operating in very good markets. We continue to perform a little bit better than the national averages, although the national news in the economy is making the businesses, particularly the commercial clients, a little bit more conservative in their outlook.

Brian, this is Tim. We would just remind you that what is really interesting is that we only converted the Colorado acquisitions in the middle of the summer of 2012, continue to build talent, and are very encouraged by the growth in pipeline we're seeing coming out of the state of Colorado with focus on sectors like agriculture and just core middle-market companies. So it's encouraging at this point.

Great. Thanks for taking my questions.

You bet. Thank you.

(Operator Instructions)

You have another question from Matt Olney from Stephens.

Hello, guys. Just a follow-up in regards to your share buy-back plan. Obviously that's in place but it wasn't very active in the fourth quarter and I'm sure you want to use your excess capital for M&A, but how should investors be thinking about your share buy-back plan in 2013?

Go ahead, Brian, you start off, I'll [finish up].

Okay. Matt, I go back to when we announced it in the third quarter call that we clearly are focused on deploying our excess capital into opportunities that will create long-term value for our shareholders. And that is our foremost objective. We wanted to put that in place for buying opportunities. And by the time we got it in place and we saw a couple of dips in our price, we -- and then plus all the rules you have to follow when you can buy, we didn't have a lot of activity in the fourth quarter. But we look at that economically. We look at it when we can generate an attractive return for our shareholders on a tangible book value and a future opportunity, we will buy back the shares and it will be about price. Otherwise, we are 100% focused into deploying that into opportunities that will create long-term value.

I have nothing to add.

Thank you.

(Operator Instructions)

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

And they will be brief. Thank you for joining us today and I look forward to speaking to you in the future. Sharon?

This concludes today's conference call. You may now disconnect. If you would like to listen to the telephone replay of the call, it will be available beginning in approximately two hours and run through February 12 by dialing 855-859-2056, or 404-537-3406 using the conference ID of 85388364. The earnings release and an on-line replay of the call will also be available on the Company's website by visiting Investor Relations area. Thank you very much.