National Bank Holdings Corp (NBHC) 2013 Q2 法說會逐字稿

Good morning everyone and welcome to the National Bank Holdings Corporation 2013 second-quarter earnings call. My name is Jay and I will be your conference 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 US Securities and Exchange Commission. These statements speak only as of today, July 26, 2013 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, Jay. Well, good day and thank you for joining National Bank Holdings' 2013 second-quarter earnings call. I am joined today by Brian Lilly, our Chief Financial Officer; and Rick Newfield, our Chief Risk Officer.

We are reporting another quarter of increased loan production of continued reduction in cost of deposits and increased earnings. Equally important, we believe that there remains significant capacity for improvement in these areas as well as others. We remain focused on building the quality relationships with consumer and business clients that will result in the continued ramp up of our loan production, fee income, and low-cost deposit growth. We will also be very focused on realizing expense reductions over the remainder of the year while remaining well positioned to leverage our operating and risk management infrastructure through additional acquisitions.

With respect to acquisitions, we agree with observations that a number of the recently announced bills that have demonstrated the pricing discipline required to achieve appropriate earnings accretion and tangible book value impact have represented win-win scenarios for buyers and sellers with the surviving company stock benefiting all of the merged company shareholders. We believe similar deals will be constructed and announced in our markets and we fully expect to be a part of that mix. Now, before turning the call over to Brian, I will also point out that during the quarter, we repurchased over 900,000 shares at a weighted average price of $18.21 and our intent is to remain opportunistic on this front. Brian?

Thank you, Tim. Good morning everyone. We earned net income of $2.9 million in the second quarter, which equaled $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 of the non strategic assets at attractive returns. Strategic loans grew $73 million, or 26% annualized, to end the quarter at $1.2 billion and now comprise 71% of total loans outstanding. The increase is driven by organic loan growth as we added loan originations of $169 million, continuing progress to our quarterly goal of $250 million. The second quarter originations represent a strong 54% increase over the first quarter and a doubling from the second-quarter last year.

The late quarter increase was led by both consumer and commercial lending. Within consumer banking, both the Colorado and Kansas City markets combined for record quarterly originations and closing in on our goal of $400 million in annual originations from the banking centers. Commercial banking had good quarter growth in loan originations, but we are more excited by the opportunities represented in their pipelines and the quality of the associates choosing to join the NBH team. Our focus continues to be on driving to over $1 billion in annual originations. The credit quality of the strategic portfolio continues to be strong with only 0.8% of nonperforming loans at the end of the second quarter.

We continue to make steady progress exiting the non strategic loan portfolio. These loans decreased $116 million, or 76% annualized, to end the quarter at $496 million. A key evidence point in the value pick up from our work out efforts is the continued quarterly accretable yield gain. The second quarter added $20 million in accretable yield transfers against only $1 million in loan pool impairments. It is worth noting that the cumulative life-to-date accretable yield pick up is now $127.9 million against impairments of only $25.3 million. The net economic impact totaled a favorable $102.6 million and reflects our conservative day one acquisition marks in the excellent results of ongoing work out efforts.

We are pleased with the balance between our organic growth and the results and pace of our problem credit resolution. We do foresee inflection points in the first half of 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 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, our treasury management growth added some nice business this quarter leading to growth in average transaction deposits and client repurchase agreements. The mix of transaction deposits, the total deposits improved to 60% this quarter, an 8 percentage point improvement from June 30 last year. The growth and improved mix lowered the cost of deposits to 0.42% and represent an improvement of 3 basis points from the first quarter. Net interest income for the second quarter totaled $44.3 million and declined $1.3 million from the prior quarter.

Net interest margin narrowed 11 basis points to 377 basis points and was primarily driven by the decrease in non strategic loans and lower reinvestment yields for the investment portfolio. Most of the non strategic loans are accounted for in the 310-30 loan pool and as a group, these loans -- these pools are yielding more than 11% annually. We expect to see continued downward pressure on the margin as we work out of the non strategic portfolio, until we reach the inflection points of growing total loans and deposits next year. However, given the steeper yield curve, we do expect stability in the investment portfolio yields, as our current reinvestment rate approximates the current portfolio yield of about 2%.

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. With regard to the credit quality of the 310-30-acquired loan pools, I mentioned earlier that we completed the quarterly remeasurement process and picked up a favorable net economic value of $19 million during the quarter, resulting in life-to-date net pickup accretable yield of a favorable $102.6 million. This statistic helps us cut through complex accounting and disclosures and shows the value being created from these problem assets. During the quarter, we did place one commercial loan pool on non-accrual, totaling $18.7 million. We carry the balance at 44% of the unpaid client balances, and it is covered by loss share. We do not see any concern with the question of our book balance, but felt that there was enough uncertainty in a future cash flows that would be appropriately conservative to discontinue the interest accretion recognition.

The non-310-30 loans also experience positive credit quality trends. These loans are primarily comprised of all originated loans, as well as the acquired non-310-30 loans. Within this portfolio, the nonperforming loans ratio improved to 2.6% from 3.6%, whereas the total past dues improved to 1.59% from 2.19% last quarter. Net charge-offs increased slightly to $1.8 million, or 0.67% of total non 310-30 loans. Included in the $1.8 million, were charge-offs of $1.3 million on two loans that we previously provided specific reserves. Given the use of these specific reserves, the allowance for loan losses of the non 310-30 loans decreased to 0.87% at the end of the quarter. Let me add that the 0.87% is significantly influenced by the over 50% weighting of the lower-risk consumer mortgages in agricultural loan portfolios and the fact that we still have 14 million in purchase loan fair value marks protected against future charge-offs. In fact, the $14 million more than doubles the $9.7 million in the allowance for loan losses on the non 310-30 loans.

Turning to non interest income, and excluding the FDIC-related income, banking-related non interest income totaled $9.1 million and increased $600,000, or 26% annualized. 50% of the increase was due to client growth in the service charges and bank card fees, with another $200,000 increase in gains on the sale of mortgages. Total FDIC-related non interest income decreased a net $400,000. We reduced the negative [to] amortization of the FDIC indemnification asset by $1.7 million as our remeasurement of a loss-sharing cash flow suggested that we collect more from the FDIC loss-share agreement. However the negative amortization continued as we expect lower losses than we had projected at the time of acquisition. In addition, the other FDIC loss-share income decreased $2.1 million -- directly related to the lower OREO -- in problem loan expenses incurred this quarter.

Total expenses decreased $2.7 million from the first quarter, as we managed to a lower level of OREO and problem loan cost. Operating expenses -- excluding the OREO and problem loan expenses -- increased $1 million compared to the first quarter and was primarily driven by a charge to increase the value of the warrant liability. As you may recall, we have 831,000 warrants outstanding and our stock price increased $1.45 per share during the second quarter, thereby driving the increase. Compensation costs increased slightly due to our April annual salary actions and additions to our revenue-generating teams, most notably the asset-based lending group. Professional fees continue the downward trend, improving over $500,000 compared to the first quarter.

Capital ratios remain strong, improving slightly from the first quarter, with a leverage ratio of 18.69%. We ended the quarter with $400 million of strategic capital deployed using a 10% leverage capital ratio. Recall that the 10% leverage is part of our regulatory start-up operating agreement. The tangible book value per share ended the quarter at $18.68, decreasing $0.45 from the end of the first quarter. The driver of the decrease was the higher yield curve as the unrealized fair value mark on the available for sale portfolio decreased the equivalent of $0.51 per share from the end of the first quarter. The tangible book value per share -- excluding the OCI marks, in other words excluding the held to maturity and available for sale investment portfolio unrealized fair value marks -- ended the quarter at $18.50, increasing $0.06 from the first quarter.

As Tim shared during the quarter, we purchased 938,000 of our shares at an attractive weighted-average price of $18.21. We have $7.7 million remaining of the initial $25 million buy-back authorization and we'll continue to be price opportunistic. Tim, that concludes my comments.

Good. Thank you Brian. Jay, we are now ready to take questions.

(Operator Instructions) Our first question comes from the line of Paul Miller with FBR. Your line is open.

Good morning guys. This is actually Thomas on behalf of Paul. Brian I think you mentioned sort of $1 billion of originations per year sort of a goal. Do you guys feel like you're getting pretty close to achieving that, given the strong second quarter, and would you sort of be expecting to grow on a net basis at that level?

Yes. Most definitely. That's been a focus of ours, really for a year now, as we have put the resources in place to drive to that and -- as we model it -- getting to that level covers the run off in our non strategic portfolio and begins to add loan balances, but more importantly, begins to add to the net interest income. The progress that we make in each quarter is encouraging to that. The resources and teams that we put in place are building their books and as we look -- as I mentioned, we are more excited about the pipelines that are sitting out there -- yet to be realized -- that is going to drive us to that level, than the production that we've accomplished to date.

Okay. Great. Then one quick follow up. On the expense reduction side, I think you guys mentioned in your opening comments, do you expect most of that to come through, sort of, reduced credit costs? Or are there other things you are looking at? Can you just provide a little more color there?

I think, Thomas, maybe to broaden that. When you put together the four banks that we have -- in many cases -- failed. Failed not just on the credit side, but even in the systems. It has taken us time to pool together all of the reporting and the tracking and we have been -- at the end of last year -- put in place all of the measures and the responsibility center accounting that we could align all the loans, deposits, expenses with the various operating groups. What that's allowed us do in the first six months of this year is track our performance and really get granular in our look at our network, our banking network, where we are making it, where we are not and asking ourselves -- when can we get those operations, which in many cases were failed, to hurdle. We look at it in a broader perspective, not just the credit-related costs but a number of our business segments and taking actions on those as we go forward.

Okay. Perfect. Thanks very much gentlemen.

Thank you, Thomas.

Next we have the line of Ryan Nash with Goldman Sachs. Your line is open.

Good morning guys. I guess first question on the net interest margin. It sounds like from your comments that we're going to see continued declines until we -- potentially see the inflection of loan growth and obviously you have continued declines from the strategic run-off. I guess the first question I have is -- should we expect the pace of decline to remain similar to what we've seen this quarter, or given the fact that reinvestment yields are having proved, should we see the pace of decline slow from here?

Ryan, that's a very good question. I'm glad you asked that. When we look forward, kind of a normal pace would be about a 10 basis points range of a decrease from that non strategic portfolio. A little bit of a wild card though, as you know, is in that SOP accounting and the purchase accounting. There is a number of pieces that when -- loans will prepay -- we get accelerated income recognition. That has been a steadily contributor in our quarterly, so we expect that to be a contributor. I only bring that up because it can be lumpy. That would impact that 10 basis points as we go forward.

Okay. And then, I guess Tim, more of a big picture question. I think your opening comments sounded a little bit more optimistic about M&A, I think, than you were last quarter. A couple of questions. Have we seen the regulatory bar raised such that it's harder to get deals done at this point? Given that, you said in your opening remarks, you anticipate that you guys will be participating. I think last quarter you talked about whether it was bank acquisitions, potentially buying branches, or even looking in the specialty finance space. Where are the efforts focused right now and given the regulatory environment, do you see any issues with getting deals done?

Look, I would tell you that we were actually confident in our pipeline in the first quarter, our M&A pipeline in the first quarter of this year. I will tell you we're more confident as we close out the second quarter. I think to your question around the regulatory bar -- I think it's reasonable to say that regulators are, probably appropriately, very careful coming out of the down turn that we've all experienced. I will tell you that the process is appropriately very methodical, at times. It's easy to become impatient with it. But we understand it and we have been methodically working through what we think is an appropriate process.

Look, we just strongly believe that you have to construct mergers that are accretive to earnings, based on reasonable revenue and expense assumptions. We think you have to have earn-back periods within that three to five year range in order to be well received in the marketplace and of course, our focus is on building franchise value in the area of the United States where we already operate. You know, I'll also add that -- while we have a bias to use cash in acquisitions where we do end up using stock -- our plan is to immediately move into the market and use our capital to buy in an equivalent number of shares. We have no intention of diluting ourselves in an acquisition. So, that I think gives you a little color on our view on the regulatory environment, gives you a little color on what we think about as it relates to the bars we need to hurdle to really create value for our company and maybe even a little color on how we might engineer a transaction to use our shares but to do it in a way that we think will be smart for all of us as investors.

Got it. Thanks for the color. Thank you just for squeezing in one, I guess, related follow-up. I just wanted make sure I heard your opening remarks correctly. That you would expect that any transaction that you would do would be within the footprint? So are you currently not looking -- I know you talked about contiguous states, you know, during the IPO process. Are you not looking at any of those any more? And also, just given that we have seen significant improvement in credit across the industry -- which I would gather puts a damper on your ability to buy distressed institutions -- is that becoming a bigger impediment as time passes to get something done?

To your first question, I think we've been consistent in saying 95% of our focus has been on the markets where we operate. It's really Missouri, Kansas, and Colorado. We like that I-70 corridor. We like certainly the attractive markets of Kansas City, Denver, Boulder, et cetera. But our core markets are Missouri, Kansas, and Colorado, and that represents 95% of our focus.

You know what's interesting as it relates to the troubled banks that remain in our markets and the troubled banks that remain across the United States, they're not in our focus but those that are in our markets obviously are. I will tell you that we're increasingly interested in those institutions that we think represent smart merger partners that perhaps have less baggage and where we have greater confidence that they can immediately contribute to earnings on a traditional basis.

Great. Thanks for taking my question.

You bet, Ryan.

(Operator Instructions) The next question comes from Chris McGratty with KBW. Your line is open.

Hey good morning guys. Tim, on your acquisition comments, the color on geography was helpful -- as was the financing aspect. Can you talk about the size of things you are looking at today?

You know, we still believe that it takes just as much work to integrate $1 billion, $1.5 billion acquisition as it does a $0.5 billion. Look, we're going to be opportunistic with around all of the right partners, prospective partners in our markets. But we still lean toward some of the you might say larger community banks in our markets.

So a couple billion dollars is certainly on the table? Okay.

You know, I would say -- let's say you know that $500 million to a $1.5 billion with a preference toward the large size.

Okay. Helpful. Then Brian, on the expense guidance or expense commentary -- aside from the credit numbers that are somewhat volatile -- should we be expecting, kind of, the core expense run rate to be growing from here or maybe I missed the comment on the expense outlook.

We wouldn't expect that it would be growing, and we're expecting that we'll be able to take actions to bring that down as we go forward.

Okay. And then lastly on the securities book, how should we be thinking about the overall side? Did I hear you say that it was going to be flat essentially?

Yes. Flat would be a -- I didn't comment on the size, but that would be fair to assume that the size of the balance sheet and the securities book would be similar.

Okay. Thanks.

Thank you, Chris.

Your next question comes from the line of Gary Tenner with DA Davidson. Your line is open.

Thanks. Good morning guys. A follow-up question on your comments in terms of regulators and M&A. Have you gotten to the point on any prospective transactions where you kind of run things up the flag pole with regulators and they have come back with comments that maybe were not as positive as you may have thought? Are they conservative to that degree or cautious to that degree?

Gary, I appreciate the question. You know we are always tentative to comment on conversations with our regulators. What I would tell you is that we don't believe we have or would bring -- I'm going to say this pretty definitively. We do not believe we would take a prospective acquisition to our regulators that they would find inappropriate. We believe our filters are appropriately, let's say conservative.

Okay. And then a second question, in terms of the non strategic loan run off the pace has remained pretty high. How do you think of it in terms of the progression from here? Does it stay high for another two maybe three quarters and then there is a long tail at the end of it? Maybe just some color on that.

You know, Gary, that's a good question. We, obviously we report every quarter and we even exceed our estimates every quarter, an amount that our team can take out. We are certainly not putting any brakes on exiting these problem credits. We have done $200 million, plus the first six months. As we currently forecast it out, another $150 million approximately for the next six months and cutting the balance at the end of the year 50% with another $200 million next year, there is a life to it. But we also have some loss-share agreements that we have our teams focused on, to get out of. We have plenty of time, runway to get the assets resolved before losing loss-share. So that works into it. I would say that's the best guess at this point. But, our teams have been very successful in exiting at very attractive returns and we want to continue that.

Brian, on a related note, you covered it in your comments, but should reiterate where we are at on economic value creation. I mean, it's not insignificant.

Sure. That $100 plus million dollars we picked up since day one, both acquisition, conservative due diligence, but really a lot of credit to the team for the way we've worked it out over the last few years. Every quarter that we have remeasured for our accretable yield, we have picked up net positive on that. Knock on wood, we would like that to continue. Those 11% yields are very good and it's given us time to go after the opportunities that will create long-term value.

All right. Thanks.

Thank you, Gary.

There are no further questions at this time. I turn the call back to the presenters.

All right. Well, everyone thank you for your time and attention today. Thank you for your questions. And have a good day.

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 it will approximately two hours and run through August 9, 2013 by dialing 855 859-2056 or 404 537-3406 and using conference ID of 12961794. 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.