National Bank Holdings Corp (NBHC) 2013 Q3 法說會逐字稿

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2013 third-quarter earnings call. My name is Sarah, and I will be your conference operator for today.

(Operator Instructions)

As a reminder this conference is being recorded for replay purposes.

I would like to remind you that this conference 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 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 President and CEO, Mr. Tim Laney.

Thank you, Sarah. Good day, and thank you for joining National Bank Holdings 2013 third-quarter earnings call. I'm 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 our cost to deposits, and we're pleased to report that, during the third quarter, we reached an important milestone, with our strong loan originations outpacing our solid resolution of acquired problem loans, allowing us to grow total loans for the first time in the short history of our company.

During the quarter we also took actions to increase our focus on core markets and improve our operating efficiency. We are exiting California and integrating our 32 limited-service retirement centers into our full-service banking center network across our core markets of Colorado, Kansas, Missouri, and Texas.

Before turning the call over to Brian, I will share with you that we believe we are well positioned to use our excess capital to create long-term value for our shareholders. Brian?

Thank you, Tim, and good morning, everyone. We reported net income of $0.9 million in the third quarter, which equaled $0.02 per diluted share. These results included a $3.4 million one-time charge for the previously announced banking center integrations and exits. Excluding these one-time costs, the earnings per share would be $0.06 and equal to the second quarter.

During the quarter we continued excellent progress growing loan originations, creating value from loan workout efforts, maintaining very good credit quality and taking actions to reduce expenses going forward.

Strategic loans grew $103 million, or 33% annualized, to end the quarter at $1.3 billion and now comprise 76% of total loans. The increases driven by organic loan growth as we added loan originations of $192 million, continuing progress towards our quarterly goal of $250 million.

The third quarter originations represent a 14% increase over the second quarter and a strong 50% increase over the third quarter last year. The linked quarter growth was led by our commercial bankers, with the commercial categories contributing $137 million of total originations. The progress of our commercial banking associates is noteworthy, given the 72% link quarter growth and the 124% increase over the third quarter last year. As we see our last quarter, we were excited by the pipeline's building for our bankers and it is rewarding to begin to realize potential. We are off to a solid start in the fourth quarter with good origination activity.

The credit quality of our strategic portfolio continues to reflect our strong underwriting culture, with just 0.8% being classified as nonperforming loans. We continue to make steady progress exiting the non-strategic loan portfolio. These loans decreased $83 million, or 67% annualized, to end the quarter at $413 million.

A keyed evidence points in the value pickup from our work out efforts is the quarterly accretable yield gain. The third quartered added a net $15.1 million in accretable yield transfers in addition to a $0.3 million reversal of prior impairment provisions. The cumulative life to date accretable yield pickup is now $143 million, against impairments of only $25 million.

The net economic impact totaled a favorable $118 million and reflects our conservative day-one acquisition marks and the excellent results of on-going workout efforts.

It is worth noting that for the first nine months of 2013, the favorable transfer to accretable yield was $50 million. Given that we still have $426 million in non-accretable difference, we expect that our workout efforts will continue to provide additional benefit to future earnings. As Tim pointed out, we did reach an important milestone this quarter, as total loans grew $19.5 million over June 30. As we have shared in the past, growing total loans is one key component to reach an inflection point for growth in net interest income.

Turning to deposits, we also grew average total deposits and client repurchase agreements $29 million, or 2.8% annualized, as average transaction deposits and client repurchase agreements out-paced the decline in time deposits. The important category of non-interest-bearing checking balances grew 11.7% annualized, and the addition of commercial clients and positive momentum in our banking centers continued to add relationships. The mix of transaction deposits to total deposits improved to 61% this quarter, a 7 percentage point improvement from September 30 last year. The growth and improved mix lowered the cost of deposits to 40 basis points and represents an improvement of 2 basis points from last quarter.

Net interest income totaled $45.5 million, increasing $1.2 million over the second quarter. Average earning assets grew slightly, but the growth was primarily driven by wider net interest margin, attaining 3.8% in the quarter. During the quarter we received an early payoff on a sizable loan, which was the last loan in one of our ASC31030 loan pools. The early payoff triggered the immediate recognition of $2.5 million in ASE31030 accretable yield, as there were no more asset in the pool. This item added 1.81% to the yield on the total ASE31030 loans, and 21 basis points to the 380 net interest margin in the quarter.

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 AS31030 acquired loan pool accounting, and all other labels labeled as non310-30 loans.

With regard to credit quality of the ASC31030 acquired loan pools, I mentioned earlier that we completed the quarterly re-measurement process, and picked up favorable net economic value of $15.1 million during the quarter. This metric helps us cut through the complex accounting and disclosures, and showed the value being created from these problem asset workouts.

The non-31030 loans also experienced positive credit quality trends. These loans are primarily comprised of all originated loans as well as acquired non-31030 loans. Within this portfolio, the non-performing loans ratio improved at 2.31% from 2.63%. Annualized net charge-offs also improved to an excellent level at just 20 basis points. We ended the quarter with non-31030 allowance per loan losses of $9.8 million, representing 0.8% of these loans, with an additional $12.8 million in remaining acquisition marks.

Turning to non-interest income, and excluding the FDIC related income, banking related non-interest income totaled $8.7 million and decreased $0.4 million compared to the second quarter. We had nice growth in our service charge income of $0.3 million, that was more than offset by lower OREO income, mortgage gains and some lower loan recovery income.

FDIC-related non-interest income totaled a negative $5.4 million, representing a decrease of $3.6 million versus the second quarter. The largest component is the negative accretion related to the FDIC indemnification asset, which totaled a negative $4.2 million, as the continued favorable performance of our covered assets increased the negative accretion $1.2 million versus the second quarter.

The other FDIC lost-year income decreased $2.4 million, driven by lower loss share expenses, an increase of $0.5 million in the FDIC claw back liability, and the sharing of gains on the sale of OREO assets totaling $1.4 million. The gross amount of covered OREO gains this quarter was a strong $3.3 million, and is netted in the expensed line item of other real estate owned expenses.

As you know, we announced actions with our banking centers to make the delivery system more efficient in the future. These actions are expected to reduce expenses $2.3 million annually. In addition, we have been implementing opportunities to make us more efficient in support and operating functions. You can see the beginnings of the benefit in lower third-quarter expenses for salary and employee benefits of $1.1 million and lower professional fees for example. Becoming more effective and efficient is a continuous focus, and particularly as we set our plans for 2014.

OREO and problem loan expenses totaled $1.6 million, decreasing $1.8 million from the second quarter. The improvement was driven by the larger OREO gains that I mentioned previously.

Capital ratios remain strong with leverage ratio at 18.54%. Tangible book value per share ended the quarter at $18.60, decreasing $0.16 from the end of the second quarter, due to the additional movement in the AFS fair value marks. The tangible book value per share excluding the OCI marks, in other words, excluding the health and maturity and AFS from investment portfolio unrealized fair value marks, ended the quarter at $18.60, an increased $0.02 per share over the second quarter.

You've probably noted in the release that we made a slight modification to the tangible equity calculation. We have tracked the common practice of netting against goodwill, that had deferred tax liability resulting from the tax deductibility of goodwill recorded in asset purchase transactions. Over time, this adjustment will grow to $0.44 for us, but at this time the adjustment is just $0.09 to the tangible book value per share. It made sense to make the adjust now.

During the quarter, we purchased 164,000 of our shares at a weighted average price of $19.84. We have $4.4 million remaining of the $25 billion buyback authorization and will continue to be price opportunistic.

One last comment regarding the tax rate. You may have noticed that the third-quarter tax rate calculates to 47%, and is higher than the 39% that we see as normal. The one-time banking center charge lower pretax income, and we increased the non-tax deductible warrant expense accrual by $441,000. Both these factors worked to increase the effective tax rate in the quarter.

Tim that concluded my comments.

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

(Operator Instructions)

Your first question comes from Paul Miller of FBR. Your line is now open.

Yes, can you talk a little bit about the -- your buyback you have in place. I mean, how aggressive -- or I mean, where do you view your stock price should be, and where did you view where the buybacks are accretive or dilutive?

Hey, Paul this is Brian. So, start with an $18.60 tangible book value. Certainly the trading that's happened in the financial service has moved our stock price up. You saw that most of our action has been in the $18s on our stock buyback, and we did do a little bit late in the third quarter in the $19s as we looked to get some of that $25 million out there. We're not -- we're not -- look, I think it's price opportunistic is the way we look at it. At these levels it would be tough to be a buyer, but as the market has moved and given us opportunities over time you could see us take advantage of that.

Okay. And on the long growth, what are some of the areas you're seeing some decent loan growth, and have you been bringing any new management and lending teams or lending people on board that could drive some of that growth going forward?

Hi, Paul, it's Tim. Yes, very good question. We have continued to look at the mix of our commercial banking teams. Late second quarter we announced that we had brought on a corporate finance team, chiefly focused on asset-based lending, and they were a solid contributor here in the third quarter. As we came into this announcement in the last week or so, we announced the recruitment of a team lead and the core members of that team to focus on providing senior bank and treasury management services to government municipal entities as well as not-for-profits. And we fully expect that team to contribute here in the fourth quarter. And finally, we've been pleased with the growing production of our generalist relationship managers as well as our specialists in both the agriculture and the energy space.

Okay. Hey, guys thank you very much.

Thank you, Paul.

Your next question comes from Chris McGratty of KBW. Your line is now open.

Good morning, guys.

Hi, Chris.

Good morning, Chris.

Tim, just asking the buyback question a little bit differently, what's preventing -- if capital deployment's been ending slower than we all expected, what's preventing you from doing a tender offer for some of your shares? And can you also update us on the progress in M&A? You were pretty optimistic last quarter.

I'll take your last question first. We continue to believe that we're in markets, and know we're in markets, that are offering up attractive opportunities. I can tell you we're engaged in and around those opportunities. And as I've said before, and we think we have a track record around this, we have been, and we're going to be, disciplined around diligence and pricing with a focus on creating long-term value for our shareholders. As it relates to a tender or buyback, I think Brian touched on it. We're going to be opportunistic and any buybacks will come with a view toward creating long-term value for our shareholders.

Okay. And on the size of deals, can you talk about how you guys are thinking about an MOE type of transaction?

Chris, we're -- I think my earlier comments pretty much summed up where we're at.

Okay. On the expense rate, Brian, based on the cost save that you talked about, the $2.3 million, does that suggest kind of a cost, a run rate of kind of in the $46 million range near term? And I guess can you talk about the ability to leverage it lower?

I think the $46 million would be high. But I look at it a couple different pieces. There's kind of our banking operations, and there's our workout efforts. In this particular quarter, we had the one-time charge for the banking close. As we go forward we see progress being made on both sides of the expense as the banking operations, as well as the workout efforts, and you see that pace down. On the banking side, we've had opportunities as we've built out the team, and we've gotten more efficient and more effective to step back and recognize those, and we're actively in our 2014 planning now that will set in place further actions that we think will benefit the expense run rate as we go into 2014.

Okay. Just one last one on the size of the security book going forward. How should we think about that Brian?

Well, clearly we built that with the idea that we would be funding loan growth as we go forward, and with the inflection point that we hit this quarter, that would be taking place as we move into future quarters, so the book --

Thanks.

The book won't be growing. It will be shrinking. We don't see a need to be leveraging up balance sheet outsized.

Thank you Chris.

Thanks, Jim.

Your next question comes from Tim O'Brien of Sandler O'Neill.

Brian, hey, could you give some color on average pricing that you guys were able to secure for the loan production that you guys delivered this quarter?

Yes, yes, I'll be happy to. In fact, it was a nice pickup because of the more concentration of the commercial, you know, the residential mortgages that we were booking and what that market is, so we were at the 4% slightly, the low 4%s for the production we put on this quarter, and that's consistent with our -- what our expectation's been and what we can do.

So do you have a -- can you quantify a little bit in terms of, you know, was there an average, or I guess what was the pricing on CNI, were you able to secure anything above prime, or were you pricing below prime, or kind of where are you in the marketplace?

You know, prime's one of those measures that not many people are using as much anymore.

You guys are using LIBOR.

Yes, a lot of LIBOR based pricing. We're getting attractive rates. I would say the commercials are in that 4.5%, even plus for some of these specialty finance deals, getting some real attractive yields there. To give you some specifics, the consumer products are still in that mid-to-high 3%s for the residential mortgages. It's a little bit more for the non-mortgage products if that helps you.

Okay. That's real helpful. And then as far as the FDIC accounting with the -- with that $2.5 million pay down on the pooled loan.

Right.

Was there a offset of some sort that was reflected to the fee income or expense line item -- or expense section of the P&L, you know, that would have swung that. You had a $2.5 million -- Yes.

Yes, anything that's covered, that has good news to it, you can automatically assume that my indem asset negative accretion is going to go up. Now they go up at a little bit different pace because I'm amortizing that over the remaining loss share life.

So it wasn't fully reflected in this quarter's P&L, that's going to be amortized.

The accounting gets disconnected in those pieces, and that's why that negative am is -- it's there. It does burn off and it's painful as it sits there.

That $424 million number that you mentioned earlier in the call, Brian, remaining accretable difference, is that what you -- So what's the prospect of migrating the rest of that to accretable yield? It's pretty good, I guess, at this point? Or --

Oh, my God. Not the full $400 million. Here's how you should think about that. That's what we dip into. When I reported this quarter that we had a net $15.1 million transferred in --

Yes.

Because of the increased cash flow projections, resulting from our workout activity, that's what we dip in to bring in at. This year, today as I mentioned, $50 million was brought in. The $424 million, if you think about the accounting was a cumulative cash to be paid on fully-paid-out, fully-interest-paid-out loans. Clearly the loans that we bought required and will have significant discounts. We're able to collect more, and that's what we transfer in. So my only point there was, we've had continue -- several continuous quarters of adding to the yield on our soft balances, and with that kind of balance in the workout efforts that we've had, we're looking forward to adding more, but it certainly could be at smaller proportions, as each quarter we measure that. I'm not giving out kind of a level of guidance, but certainly we would expect some more.

So kind of looking out into 2014, you know, suffice it to say, if the -- if the progress in management of those loans continues the way you -- it has and the way you would expect, then we'll see diminishing movement to accretable yield there next year.

It's more a factor -- think about the balance. You know, we've gone from $2 billion of balances there to now $400 million.

Sure. And those will keep -- that balance keeps getting smaller with the successful workout efforts.

Yes. Tim, this is Rick Newfield. So this might be a little additional perspective. As of September 30, our special assets team managed $324 million all in. I don't have the breakdown of the 31030 versus non-31030. But that's down by over half from January 1st, so I think to Brian's point is, the pool of those workout loans continues to diminish. That's going to be reflected in the amount that we can transfer to accretable creed. With that said, as we continue to look forward, we do see opportunities, as Brian, mentioned to realize better cash flows than we currently forecast.

Thanks for all the color. Nice quarter.

Thank you.

Thanks, Tim.

Your next question comes from Matt Olney of Stephens.

Hey, Tim, you mentioned the lending teams you've hired in the recent weeks and months. Can you talk more about your capacity to take on additional teams, and if you have anymore holes you want to fill, whether it's by geography or by loan type?

Sure, sure. We remain committed to operating with approximately 58 commercial bankers and we also remain committed to looking at how we can best optimize those 58 bankers. We look at it to your point. We look at it both geographically and as it relates to specialized business opportunities. So, you know, as we're planning for 2014 and looking at opportunities, we have banking offices, for example, in Dallas and Austin. Like many other banks, we continue to see pretty amazing opportunity in those markets and we'll continue to look for opportunities to redistribute talent into those markets.

The same could be said for specialty businesses. We've been very pleased with how quickly the corporate finance asset-based lending team has ramped up. We've also been pleased with the pricing and the relationship business that has been generated there. A good example of another opportunity is what I've previously mentioned with the government and not-for-profit banking team, and we will continue to look at the performance of each of our relationship managers. We have set very clear standards around production, not only with loans but fee income and other relationship business, and we'll continue to manage and coach to ensure we have the best 58 players in the right fields and covering the right businesses and performing to our expectations.

I covered a lot of ground there. I hope that answered your question.

No, that does, Tim, and you bring up another point, I guess, with your comments on Texas. Where does Texas fit in your overall strategic vision the next few years for you guys?

Well, it certainly has proven to be a solid contributor, even on a somewhat limited basis where we have offices only in Austin and in Dallas. And, you know, we would expect it to continue to be a solid contributor. The -- that is a market where the bid-as spread remains strong as it relates to acquisition, and so we don't believe there will be M&A opportunity there that would work within our framework for acquisitions, but we certainly enjoyed benefiting from the organic growth that we're realizing.

Thanks for the color.

Thank you.

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

Good morning, Gary.

Excuse me, good morning, guys. Just a question to follow up on that a little bit. I wondered if you could talk a little bit about the new government nonprofit banking unit, maybe talk about some of the competitive dynamics, you know, in that segment, pricing things along those lines.

Right. You know, to be clear, it's in no way related to bond financing. This is the use of senior bank debt to address a surprisingly significant number, of you might call it, niche needs within municipalities, and we've been convinced that there's a solid market. The team has a very good track record here in the state of Colorado, and we believe there's opportunity to expand and leverage that team across our core markets of Missouri, Kansas, Colorado, and to a degree even Texas. So it's about serving those niche needs with senior bank debt. It's also about stepping up our game around serving the treasury management needs of these municipalities, as well as pursuing in the right way more not-for-profit entities that often bring with them, again, attractive deposits, attractive treasury services, but limited financing needs.

And in the government sector, what's the kind of pricing, you know, what kind of loans are you doing there, are they short-term bridge loans, what kind of financing is it?

It will cover a number of pieces which on the shorter end would just fit into our normal commercial structure. But to your point, there are -- and as we looked at it, a 15 year amortizing loans of some size, and one of the capabilities that we have internally that we were able to address is, we're going to hedge that on our balance sheet when it makes sense for us as, we're keenly focused on keeping that rate sensitivity at a appropriate level and not loading up on fixed-rate longer life loans. And so it will be a mix of all of those, and we think we've got it covered. So we -- it was a very thoughtful process.

All right. Thanks, guys.

Thanks, Gary.

We have a follow up question from Tim O'Brien of Sandler O'Neill. Your line is now open.

Just to stick with that team hire in talking about cash management, treasury products, who do you see -- first of all, are they going to be doing work in the Kansas City area, or is this predominantly a team that's going to be focused on Colorado?

Yes, we absolutely intend to lever the team across all of our core markets, which would include -- certainly would include Kansas City, Overland Park, or, said another way, Missouri, Kansas, Colorado, and to an extent Texas, and feel good about that. And then the question on treasury management again was what, Tim?

Well, just, so do you have folks in place working on Kansas City, selling those products at this point, or is that something you're going to build towards?

No, no, no. Absolutely. We have the team -- we have the treasury management team in place not only in bank Midwest, but Colorado and Texas.

Great color. And then, that second question -- as far as competition for that business is concerned, who -- is it the money setter banks that have the most robust platforms and capture most -- more of that business, or U.S. Bank and such? Or where are you going to be pursuing market share from? Who are you going to be pursuing from?

Look, we don't want to make the money center banks, the big banks mad at us, but we believe there's an underserved market there, and niche opportunities that are not being covered, based on our experience to date, and we're going to continue to pursue those opportunities. We have a lot of respect for our competition, really not only at the large bank level but, call it the regionals. And then I would have to say at the community bank level, there are also some fairly significant gaps where a number of community banks still tend to, it would seem, be very oriented to a loan-only business, and we remain committed to delivering a full range of services.

Thanks for the color, Tim.

You bet. Thank you.

Thank you for your questions. I will now turn the call back to Mr. Laney for his closing remarks.

Thank you, Sarah. I just want to thank everyone for joining us today. In particular, thank those of you that asked questions. Very good questions this morning, and we look forward to being with you again soon. Take care.

And this concludes today's conference call. If you would like to listen to the telephone replay of this call, it will be available beginning in approximately 2 hours, and will run through November 8th, 2013 by dialing (855) 859-2056 or (404) 537-3406, and referencing the conference ID of 64518392. The earnings release and an online replay of this call will also be available on the company's web site on the Investor Relation's page. Thank you very much and have a great day. You may now disconnect.

Thank you, Sarah.