National Bank Holdings Corp (NBHC) 2013 Q1 法說會逐字稿

Good morning, everyone and welcome to the National Bank Holdings Corporation 2013 first quarter earnings conference call. My name is Candace and I will be your Operator for 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 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 and uncertainties and they 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 President and CEO, Mr. Tim Laney.

Thank you, Candace. Good day and thank you for joining our 2013 first quarter earnings call. Today I'm joined by our Chairman, Frank Cahouet, our Chief Financial Officer, Brian Lilly, our Chief Risk Officer, Rick Newfield, and our Head of M&A and Strategy, Don Gaiter.

I need to share with you that Brian has had a death in his family and he is joining our call remotely so please bear with us.

Turning to the first quarter, we realized solid organic growth during the period, growing loans 11.4% annualized. As another reference point, loan originations grew 32.7% over the same quarter a year ago. More important, we did so while maintaining our prudent underwriting standards. As a reminder, Rick Newfield is with us and he is prepared to answer any questions that you might have during Q&A regarding our risk profile.

During the quarter we grew our transaction account deposits 4.8% annualized and we realized a three basis point improvement in total cost of deposits. Our non-interest expense totaled $47.9 million in the first quarter of 2013 compared to $53 million in the first quarter of 2012, a decrease of $6.4 million. We have significant opportunity to improve our operating leverage both with continued revenue growth and expense reduction.

During the first quarter we were engaged in a wide range of M&A activity including work on potential whole bank acquisitions, branch purchases and specialty business acquisition opportunities. Again, Don Gaiter is here and he'll be providing an update on M&A activity following Brian. For now, I'll turn the presentation over to Brian Lilly for a more detailed review of the quarter. Brian?

Thank you Tim and good morning to everyone. We earned a net income of $2.1 million in the first quarter which equaled $0.04 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 were focused on two key objectives, the growth of the strategic loan outstandings and the decrease of non-strategic loans while maximizing returns.

Strategic loans grew $31 million or 11% annualized to end the quarter at $1.2 billion and now comprise 65% of total loans outstanding. The increase was driven by organic loan growth as we added loan fundings of $109 million. The first quarter fundings represent a strong 33% increase over the prior year first quarter and a decrease over the fourth quarter. The linked quarter decrease is primarily attributed to the seasonality of some of the segments that we serve. Segments such as agriculture, energy, and consumers have historically been less active in the first quarter.

We continue to attract talented bankers and the loan pipelines are building nicely. We remain confident that we are making progress towards achieving our goal of $1 billion in annual originations. The credit quality of the strategic portfolio continues to be strong with only 0.6% as non-performing loans and is unchanged from the last quarter.

We continue to make steady progress, exiting the non-strategic loan portfolio. These loans decreased $99 million or 56% annualized to end the quarter at $612 million. A key evidence point in the value pickup from our workout efforts is the continued quarterly accretable yield gains. The first quarter added $14.9 million in accretable yield transfers against only $0.3 million in loan pool impairment.

We are pleased with the balance between our organic growth and the results and pace of our problem credit resolution. We do foresee an inflection point later this year to early 2014 whereby total loans will begin to grow. Of course, the economic landscape will have to be accommodative but we feel very good about the teams we now have in place and the momentum that they are building. We continue to remain focused on organic growth as a key value creating strategy.

In terms of deposits, we have made progress with our strategy of growing transaction deposits which averaged $2.4 billion in the first quarter, growing 5% annualized over the fourth quarter and now represents 59% of total deposits. Quarter end time deposits decreased $96 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 70% of these balances with the most recent retention approaching 80%.

Our strategy is focused on client relationships that work to decrease our cost of deposits to 45 basis points in the first quarter and represented a three basis point improvement from the fourth quarter.

Net interest income for the first quarter totaled $45.6 million and declined $4 million from the prior quarter. The net interest margin narrowed 21 basis points to 3.88% and was primarily driven by the decrease in non-strategic loans. Most of the non-strategic loans are accounted for in the 310-30 loan pools and as a group, these pools are yielding more than 10% annually. We expect to see continued downward pressure on the margins as we work out the non-strategic portfolio until we reach the inflection points of growing loans and deposits later this year to early next year.

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 quarter re-measurement process for the 310-30 acquired loan pools and picked up net economic value of $14.6 million. The approved cash flows and forecasts of these loans resulted in favorable net transfers to accretable yield of $14.9 million while only recording, through the provision for loan losses, impairments of $0.3 million. The favorable first quarter results bring the life-to-date net increase in economic value of the 310-30 loans at $83.6 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 declined to 3.6% from 4.0% whereas the total past dues improved to 2.19% from 2.74% last quarter. In addition, we are pleased that the net annualized chargeoffs for these loans were 44 basis points for the first quarter, reflecting continued good performance.

The allowance for loan losses attributed to the non-310-30 loans was 1.04% as of March 31 and the provision for loan losses of $1.1 million covered the net chargeoffs and provided for new loan growth.

Excluding the FDIC related income, non-interest income totaled $8.5 million and decreased $2.3 million compared to the fourth quarter. The decrease was driven by lower recoveries on assets previously charged off and lower service charges on deposits. A large part of the service charge decrease is seasonal but we have implemented presentment order changes to comply with these standards and loss mitigation strategies that have lowered the number of overdraft occurrences. The impact of these initiatives is reflected in the first quarter's results.

Within the FDIC related income we recorded an increase of $0.5 million due to a $0.6 million favorable adjustment to the clawback liability as part of the quarterly re-measurement of covered loans.

Operating expenses were down slightly quarter to quarter, excluding the problem loan and OREO cost variances. Compensation related expenses increased as we reset the payroll taxes and incentive plans for 2013. We did benefit in the quarterly comparison from our focus on lowering perpetual fees, decreasing these fees over $1 million from the fourth quarter. Total OREO and problem loan expenses decreased to $7 million in the quarter and will continue to fluctuate going forward. However, we are seeing some stability in these costs that should benefit future periods.

Capital ratios remained strong, improving slightly from the third quarter. We ended the quarter with $400 million of strategic capital to deploy using our 10% leverage capital ratio. The tangible book value per share ended the quarter at $19.13, decreasing $0.04 from the end of the fourth quarter. The primary driver of this decrease was a slightly higher yield curve as a fair value mark of the available-for-sale portfolio, decreased the equivalent of $0.08 per share from the end of the fourth quarter.

That concludes my comments. Now let us turn to Don Gaiter for an M&A update. Don?

Thank you Brian and good morning. A key part of our strategy is to deploy capital to acquisitions. Our efforts are centered across four areas of opportunity -- whole bank, unassisted transactions, branch divestitures, specialty businesses that will be complementary to our Company by enhancing revenue through loan and/or fee generation, and FDIC assisted transactions.

We have an active dialog across all areas except for FDIC transactions. The slowdown by the FDIC has been disappointing and we're not seeing activity in the pipeline with these types of transactions.

As we have stated before, our efforts are focused in transactions that will add market share in our primary markets of Colorado, Kansas and Missouri with an emphasis on the I-25 corridor along the Front Range of Colorado from Colorado Springs to Denver and north into Greeley/Fort Collins and the I-35 corridor from Kansas to Missouri and to the complimentary markets in southern Iowa.

We continue to see an attractive landscape with a full set of targets in our markets. That includes a total of 92 institutions with $110 billion of assets including troubled institutions and banks with assets in the $500 million to $10 billion range.

Our fee for acquisition strategy remains very strong. We have a significant set of targets. We have a limited number of active acquirers in these markets and we continue to find that our targets are under pressure from increased regulation, earnings headwinds, and management fatigue. We do, however, remain very disciplined both in terms of our diligent standards and our pricing standards.

Our focus is to protect the quality of our balance sheet while adding franchise value by structuring transactions that we believe will add to our market value. We do remain optimistic that we will deploy capital to M&A given the present landscape and are highly focused on actionable transactions.

Let me now turn it back to Tim Laney.

Thank you, Don. Candace, we are now clear to take questions.

(Operator Instructions)

And your first question comes from Paul Miller with FBR Capital Markets. Your line is now open.

I think everybody understands the M&A side of it and how difficult it is out there and I'm sure you're going to get some more questions about it but I want to ask about your bankers. How many, you said you've been able to attract some good bankers. How many commercial lenders do you currently have and how many did you add over the quarter?

We have approximately 58 commercial bankers centered in our, and focused on our, core markets of Kansas City and the State of Colorado, smaller team in the markets of Dallas and Austin, Texas. We continued to top grade that set of bankers and this quarter we brought in eight new bankers. We tend to source these bankers from what we believe are strong reputations with a focus on capturing the full relationship of the client and we are finding that we're pulling bankers from institutions like Wells Fargo, Commerce Bank in Kansas City and a number of other fine institutions in our landscape.

And what is the goal, if you don't get any M&A done over the next couple quarters, what is your goal with those commercial bankers? How big do you want to grow that?

Our map looks something like this -- we are ramping up -- I'll focus on loans first. We are ramping up to an average goal of loan production per banker of $50 million a year per banker so think of us at this point of really charging toward that $10 million point with an expectation that our full run rate over the next 24 months will be hitting that $15 million. Of course, if you take that 58 number times, let's call it $10 million, that's $580 million of production a year. As a reminder, we have 101 branches or banking centers in our network and the goal for each of those branches on an annual basis is $4 million in consumer and small business production. That's another $400 million. You put those together and that's what gets us to that $1 billion of annual production that the math tells us we need to offset the eventual rundown in the accretable yield and jet us toward that 1% return on assets.

That was a very complete answer. I want to thank you very much. You guys have a good day now.

And your next question comes from Ryan Nash with Goldman Sachs. Your line is now open.

Just a follow up on some of the things related to acquisitions, can you give us just a little bit more color on -- I think it's easy for us to understand the FDIC part of the equation given that there has been a significant flow down there but we've talked for several quarters now about manager fatigue and other guys looking for exit strategies but I guess at this point what do you see as the biggest impediment to getting a deal done over the next couple of quarters?

As we've stated before, we've been very focused across four channels. As you mentioned, the FDIC has been disappointing to us. I have to confess that the lack of activity there has been surprising to me given the number of banks that have elevated and chronically elevated [taxes ratios] and a relatively low level of capital.

We have been very focused on whole bank transactions, branch divestitures and specialty businesses and have had a very active pipeline there. I will tell you that we are very disciplined. We are disciplined in terms of our diligent standards and our pricing standards and are really looking to enhance franchise value so we have been very engaged and continue to do so in our core markets.

Ryan, I would answer your question this way -- this is Tim. We're still grappling or we think some prospective sellers are grappling with the fact that prior to going into this downturn and this troubled economic cycle, they were looking at stock prices of, let's say $30.00 to $35.00. Today they're trading at $8.00. We're talking about a trade, call it, 125, 135 of tangible book. Let's say that takes them to $10.00 or $11.00 on the upside and they're still grappling with what they feel like they could have sold their company for pre-downturn and the kind of pricing they're seeing today.

Another factor that frankly we've grappled with is where we've had opportunities to make deals work is we looked at the reliability of the longer term earnings stream. For example, when we looked at the dependence on something like mortgage revenue, we just simply couldn't get comfortable with the transaction because we just didn't feel like the transaction would deliver the ultimate long term EPS we needed in order to get comfortable with that type of acquisition and then as we've all said, I think that's a long way of saying that we're still really working on that spread between the bid and the ask and that's where we believe patience will be rewarded. At the same time, I would expect this question, how patient can you be? We fancy ourselves as economic animals. We've approved, the Board has approved a $25 million buyback program thus far. We're more than prepared to increase that buyback if the opportunity presents itself but we're not going to buy shares in at any price. We view ourselves as opportunistic and we will buy in shares where we believe it will be ultimately beneficial to long term investors.

Okay and if I could ask a little bit of a different question, I know in the release you guys talked about prudent underwriting standards and we've obviously heard from a lot of other banks that competition is accelerating at this point in time. I guess I'd be interested to hear, I know you said that there was some seasonality that drove the lower quarter over quarter originations but I'd be interested to hear how much of the quarter over quarter declines do you think was seasonal versus how much is being driven by you guys stepping away from intensifying competition.

Let me address that. Let me talk a little bit about the seasonality as it relates to the mortgage business. We know there is a steady increase in applications through the first quarter and the second quarter and actually saw those applications running at 400 during the month of March so we do expect that activity to pick up.

As it relates to commercial, there is a cycle as you probably know around financial statement receipt and whether that's coming from an external auditor which in many cases would be the situation or a company is internally prepared so there simply is a timing. I will tell you that it was not an issue in terms of competitive pressure. It was really, truly seasonality as we're seeing more opportunities as we finish the month of March and heading into the second quarter.

You may want to mention on the consumer front what we're seeing, continuing to see in terms of average FICA scores, loan to value on the loan quality front there and then we can speak a little more to commercial as well.

Certainly, and I will again. I just thought that would be a good segue to the consistency and the fact that we're maintaining the discipline around our underwriting and structuring standards so with respect to residential and this may be a helpful way to sort it, over 80% of our loans originated in the first quarter had FICOs of 760 or greater. I mentioned in the past calls that we're averaging in the 750 range but I think another useful way is to look at simply the tranches or kind of how those segment out.

With respect to loan to value, over half have loan to values of 60% or less but you're going to see overall loan to values in the mid to upper 60s. Debt to income is maintaining right within prudent standards.

And then on the commercial front, keep in mind part of our thesis in moving into these markets is we really did feel like we would ultimately be competing against more rational players, no better example than Kansas City where you have Commerce and UMB and we respect both of those institutions. We find them to be rational with their credit standards. I will tell you we are seeing increasing pricing pressure on the best of the best deals and so that is, Ryan, the issue we grapple with in the middle market more than anything else.

And your next question comes from Chris McGratty with KBW. Your line is now open.

Tim, can you speak to contingency plans? Obviously, the acquisitions are what everyone is after today. It's been seven or eight months since the IPO. It seems like the FDIC game is no longer a viable option. Can you talk about your ability to get a deal done especially with a currency being below book value?

It is a bit of a conundrum, right? It's unfortunately that the stock is trading where it is. We understand that have $400 million plus of unlevered capital puts pressure on that stock price and we are very thoughtful in approaching the first acquisition that we intend to announce. We believe it's got to be very solid in terms of the kind of financial return it will create for all of us as investors and we remain optimistic that we're going to be able to demonstrate to the market that we put ourselves in a good area of the United States where there are more than enough opportunities to execute smart transactions.

Having said that, I'll turn back to a point I made earlier which is while we're not prepared to declare a date certain at which we would say, look, this landscape just doesn't lend itself to smart acquisitions, we're conscious and the Board is conscious of the fact that when that point comes we'll be in a position to very thoughtfully buy in shares and we believe that that can, in its own way, be a very good move for our long term investors.

Keep in mind, another opportunity that presents itself is we have built an infrastructure to support a midsized bank, to be clear, that is compliant with our key regulator to support an institution of $10 billion to $50 billion in assets. Should we find ourselves in a position not to execute on our acquisition strategy, we would move to significantly reduce our operating infrastructure expense and right-size our operations down to, let's call it a $5 billion to $6 billion community bank.

Just one more question on M&A, Tim. The size of the first deal -- obviously we're all looking for the first one -- is there a preferred size for your first transaction? Is it half a billion? Is it kind of a couple billion? Any help would be great.

Why don't I, Don, ask you to answer that?

We, our thought is really above that $1 billion level, that $1 billion to $2 billion. Having said that, we're actively looking at transactions over $500 million so that should give you an idea of the ranges here.

Okay, and then one last one on the expenses. Maybe it's one for Brian. How should we be thinking about near term quarterly expense rates? Obviously, there is fluctuation in the work out costs but I think it was all in about $48 million this quarter which is actually down from the quarter before. Can you help us on, assuming no deals, what we should be thinking about run rate expenses?

Chris, I think you're right on. That's carving out the OREO and the problem loan expense which will fluctuate. The base should be pretty consistent as we look forward pending any other actions that we decide to take.

And your next question comes from Matt Olney with Stephens. Your line is now open.

Circling back on the M&A discussion, I think Don, one of the avenues you mentioned was acquiring some kind of specialty business that compliments the core bank. Can you remind us what the ideal acquisition would look like within this specialty business in terms of what type of business and what size?

Obviously, we have built a lot of skill sets in our bank that can be levered through specialty businesses so we are looking at plays in the loan generation business so it could be specialty finance, if you will, things like large ticket leasing, asset based lending, etcetera.

In addition to that, we are actively looking at fee opportunities and again, we are looking at plays there in the consumer space as well as other unique opportunities and again, this will be leveraging the infrastructure that we built both from a risk management perspective, underwriting perspective on the platform that we have.

I don't want to get far out over my skis but I will tell you that we're also looking at lifting out specialty themes and we believe we'll be in a position to announce something on that front in the very near future.

Okay, that's helpful and then circling back on the loan growth outlook, you've answered some good questions on this. A lot of your competitors also made some similar comments about 1Q just being very slow seasonally but some of your competitors also made some comments that the funding so far in April has picked up considerably from the first quarter levels. Can you give any commentary about what you've seen more recently over the last few weeks in terms of the funding levels versus the first quarter?

Our pipeline is stronger than it's been in any point in the short history of our Company.

And your next question comes from Peyton Green with Sterne, Agee. Your line is now open.

I was just wondering, Tim, what do you think a good timeframe is before we might see more active capital management? Clearly, with $400 million in excess capital there is plenty to do a combination of M&A and recycling of the capital. What is a good timeframe to keep in mind for that?

We've been frustrated with the current blackout period. As we've watched recent pricing we would have been buyers in the market. We've targeted a price at which we would buy below and if we see that pricing once we come out of the earnings release blackout, we will be entering the market.

Okay and is there -- how would you ballpark the expense base that you're keeping in place to run a bigger company given the opportunity in the coming M&A cycle?

I think as we've relayed to you a couple times and tried to convey through these conversations, we're very encouraged and excited about the current pipeline and that is what we are really running after. We have a unique opportunity to build something special here so before we give up on the opportunities we really want to play those out and so as we shared, I think it's a little early to be putting any type of timeframe on that and know that we believe strongly in the quality of the pipeline that we have and it has taken time but once it happens, in hindsight that's a short period of time so that's what we're running after.

So do you think 18 to 24 months is a reasonable amount of time?

I'm not putting any timeframe on it, Peyton. I think we are having those discussions actively and as we shared, I think Tim did a good job sharing with you, we have options and we're assessing those options and the quality of those options as we move forward.

And Brian, I can't help myself but 18 to 24 months sounds like a lifetime to me. I don't know if I have that much time left.

Fair enough, I appreciate the color.

(Operator Instructions)

Your next question comes from Gary Tenner with D.A. Davidson. Your line is now open.

My questions have generally been answered. Just in terms of the 58 relationship managers you have on staff right now, can you just tell us how many have been there, say, for more than six months versus less than six months?

I think the way we measure that, Gary, is that we've got currently about 33 of those are new to the organization in the last couple of years and a number of those we're still working through but you can see in total that is quite a turnover and that's what makes this exciting is that in the last number of quarters, a number of those bankers have come onboard with their pipelines filling up and you can see, as Tim mentioned, the pipeline is the best, the biggest and the best quality we've ever had and that gives us encouraging feelings going forward.

Can you quantify where the pipeline was at March 31 compared to yearend?

We quantify it on revenues and other pieces and it's not consistent with the way some other companies I've seen talk about it so we capture it internally. I think you'll see it in the results as we go forward.

And we have no further questions at this time.

Very well, Candace, thank you and thank you for joining us and thank you for your interest in National Bank Holdings. Have a nice day.

And this conclude today's conference call. You may now disconnect. If you would like to listen to the telephone replay of this call, it will be available beginning in approximately two hours and run through May 14 by dialing 855-859-2056 or 404-537-3406 and using conference ID 33675559. The earnings release and an online replay of this call will also be available on the Company's website by visiting the Investor Relations area. Thank you very much and have a great day.