National Bank Holdings Corp (NBHC) 2016 Q2 法說會逐字稿

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  • Operator

  • Good morning, everyone, and welcome to the National Bank Holdings Corporation 2016 second-quarter earnings call. My name is Heidi, 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 stream, gross margins, taxes, and noninterest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties, and other factors which 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's Chairman, President and CEO, Mr. Tim Laney.

  • - Chairman, President and CEO

  • Thank you, Heidi, and good morning and thanks for joining National Bank Holdings' second quarter earnings call. Of course I have with me our Chief Financial Officer, Brian Lilly, and Rick Newfield, our Chief Risk Officer.

  • I'm pleased to report that during the second quarter we had a record level of new loan originations, a record level of earnings despite taking additional earnings against our energy portfolio and continued progress in reducing our expense run rate. I would also point out that outside of the drag from our energy exposure, our originated loan portfolio continued to exhibit excellent credit quality with second quarter net charge-offs of only two basis points.

  • We have a lot to cover this morning, so I will go ahead and turn the call over to Rick to provide more detail on our loan portfolio. Rick.

  • - Chief Risk Officer

  • Thank you, Tim, and good morning, everyone.

  • There are four key points I will cover this morning. First, credit quality of our $2.6 billion non-energy portfolio remained strong and trends continue to be very positive. Second, our energy portfolio remains stressed by industry conditions. However, problems remain centered in our four previously identified nonaccrual loans. Third, I will provide guidance for provision expense for the remainder of 2016 and fourth, I'll give some color on our record loan originations during the quarter.

  • Let me start by discussing overall credit metrics and trends during the second quarter. Including energy loans, the ratio of classified loans to total non 310-30 loans improved from 2.9% at March 31 to 2.3% at June 30. Excluding energy loans, the classified loan level also improved for the third consecutive quarter with the ratio of classified loans to non 310-30 loans decreasing from 1.4% as of March 31 to 1.3% as of June 30. Total nonaccrual loans decreased during the quarter from 1.87% at March 31 to 1.46%, with the decrease primarily driven by the payoff and partial charge off of one our energy nonaccrual loans that had been fully reserved in prior quarters. Excluding energy loans, nonaccruals continue to decrease improving from 0.57% of non-310-30 loans to 0.47%.

  • For the second quarter, net charge-offs were 58 basis points annualized driven by the one energy loan charge-off which as I said was fully reserved in prior quarters. The resolution of this loan leaves three remaining nonaccrual energy loans. Outside of energy, net charge-offs were just $102,000 for the quarter, or just two basis points annualized, as Tim said. For the first six months of 2016, annualized net charge-offs were 32 basis points and excluding energy, just 6 basis points annualized. Overall, past dues in our non-310-30 portfolio remain low and past dues of 90 days or greater remains immaterial and nil.

  • Now let me turn to our energy loan portfolio. As a whole, energy sector loans were $104.7 million as of June 30, 2016, and represent only 3.8% of total loans, only 2.4% of earning assets, and only 20.1% of our company's risk-based capital. We saw meaningful paydowns during the quarter with funded balances in our energy portfolio decreasing $27.4 million or 20.8% from March 31, 2016.

  • Our $104.7 million energy portfolio is comprised of performing loans of $79 million in funded balances and the three remaining nonaccrual clients with $25.8 million in balances. We had no new energy nonaccruals in the second quarter. With respect to the three remaining nonaccrual loans, we did see further deterioration on two of these loans, and therefore took additional specific reserves of $5.1 million on these loans. With the significant paydowns in the performing energy portfolio, the net additional energy reserves taken during the quarter were $4.3 million as compared to $10.7 million in the first quarter. The total reserve on energy loans was 14.8% at June 30, 2016.

  • I do want to provide some additional perspective on one of our three remaining nonaccrual loans. It is a midstream sector company, and its deterioration drove the majority of our additional reserves on the energy portfolio. The company is working with the bank group on resolution strategies that could maintain and potentially increase asset values. However, should these strategies falter, and the bank group moves to orderly disposition of the assets, there is additional impairment risk on this loan of approximately $4 million.

  • We continue to review and conduct stress testing of each energy client monthly. Overall we saw the performing portion of our energy portfolio as stable during the quarter. We do have one substandard accruing client with $3.5 million in loan balances that we continue to monitor closely based on its tight liquidity. I will close out on this topic by simply pointing out that energy loans again composed only 3.8% of our loans, only 2.4% of our earning assets, and only 20.1% of our company's risk based capital.

  • Let me provide some updated guidance on provision expense for the remainder of 2016. There are three important considerations. First, provision expense in 2016 will continue to cover our expected loan growth at about 1% of net growth. Second, outside of energy, we continue to expect minimal charge offs, ranging from 10 to 15 basis points annualized for the second half of the year. Third, we do see some potential for the additional impairments within the energy portfolio, principally from the midstream sector nonaccrual loan I previously discussed.

  • As Tim stated, during the second quarter, we delivered record loan originations. Commercial loans represented 51% of the originations. Commercial real estate was 28%, and consumer, principally single-family residential loans, was 21%. Metrics relative to granularity and quality remain consistent with prior quarters with the average commercial loan funded balance at $1.2 million, and residential loans maintaining an average FICO score of 757, an average balance of $154,000 and an average loan to value of 73%. We continue to maintain discipline relative to our self-imposed concentration limits across industry sector, real estate property type, and single credit concentration.

  • I will now turn the call over to Brian.

  • - CFO

  • Thank you, Rick, and good morning, everyone.

  • There's a lot to like in last night's release while at the same time aggressively working through a few challenging energy credits. Excellent loan growth, non-energy credit performance, and expense management provide great building blocks and were partially offset by a decrease in the acquired problem loan accretion income. I will touch on these topics as well as update our guidance for the remainder of 2016.

  • Total loans ended the quarter at $2.7 billion. It was fun to deliver a record amount of originations in the second quarter, realizing the promise we saw in our new business pipelines. For the first six months loan originations totaled $480 million, and over $500 million if we adjust for the $42 million paydowns in the energy lines of credit. The strength of the loan originations driving the second quarter annualized total loan growth of 22.7% and a continued strong loan pipeline has put us back on track for our 2016 goals of over [1 billion] originations and 15 to 20% annual loan growth.

  • Turning to deposits, average deposits and client repurchase agreements grew $169 million, or 4.3%, and benefited from one energy client parking large deposits with us during the quarter. The temporary deposit added $176 million to the second quarter average, accounting for the linked quarter average change. Led by commercial clients, demand deposits continue their strong growth with 14.6% annualized and 8.4% over the second quarter last year. For the remainder of 2016, and given our lack of incremental funding needs, we expect total average deposit growth in the low single digits.

  • In terms of earning assets we expect to continue to fund the loan growth with cash flow from the investment portfolio and acquired problem loan paydowns in addition to deposit growth. As a result, we are forecasting earning assets to increase in the low single digits for the year, ending 2016 in the range of $4.3 to $4.5 billion. Fully taxable equivalent net interest income totaled $35.8 million and decreased $3.2 million from last quarter and was below our guidance range by a few million. The largest driver of the miss was the $2.5 million lower 310-30 accretion income, as well as slightly lower yields on the non 310-30 loan portfolio.

  • Regarding the 310-30 accretion income, we experienced generally normal decreases in outstandings. However, we did not realize any accelerated accretion this quarter and the quarterly remeasurement of the 310-30 loan pools resulted in lower monthly accretion levels as the timing of the estimated cash flows were lengthened. The quarterly accelerated accretion has been fairly consistent. In fact, adding about $1 million to the first quarter this year. The impact of both of these factors is best seen in the lower 310-30 yield decreasing from 21.6% last quarter to 17.8% this quarter.

  • The net interest margin narrowed 42 basis points to 3.26%. The lower yield and balances of the 310-30 loans accounted for 26 basis points of the narrowing, with the higher levels of short-term investments accounting for another 14 basis points.

  • Looking forward we are forecasting quarterly net interest income in the range of $36 million to $37 million as we replace the very high yielding 310-30 loans and lower yielding investment portfolio with new loan fundings. Of course, there is the potential for higher levels of accelerated accretion income on the 310-30 portfolio. The resulting net interest margin is expected to be in the range of [3.35% to 3.45%] for the last two quarters of 2016.

  • As further guidance detail, we are forecasting 310-30 accretion income of approximately $7 million in the third quarter and $6.5 million in the fourth quarter. Both quarters would yield close to 17%. As usual, these estimates can be higher for accelerated accretion income and lower for changes in the estimated future cash flows and timing thereof, resulting from our quarterly remeasurement process.

  • Rick did an excellent job addressing credit quality and please refer to his comments for our 2016 guidance. Noninterest income totaled $10.5 million and included good linked quarter growth in service charges, bank card fees, and gains on the sale of mortgages. In addition, we sold a Denver building for a nice $1.8 million gain. The lower market interest rates caused another $450,000 negative fair value mark to market on fixed rate loan hedges. The year to date negative fair value mark to market on fixed rate loan hedges totals $1.1 million and will reverse eventually but has negatively impacted the quarterly growth of total noninterest income.

  • Regarding the remainder of 2016, we are forecasting year-over-year growth in the low single digits, driven by our expanding treasury management fees, increased mortgage gains and interchange fees which more than offset an expected decrease -- continued decrease in overdraft fees. Noninterest expenses totaled an excellent $33.3 million for the quarter and came in better than our specific guidance of $36 million.

  • OREO gains and problem asset workout expenses netted to a credit of $653,000 as OREO gains of $1.6 million came in higher than planned. Salary and benefits expense decreased $1 million as we realized expense reduction initiatives as well as lower incentive accruals.

  • Looking forward we are lowering our quarterly expense guidance of $34 million to $35 million. We have planned for reasonable level of OREO gains but could do better. Recall that we began this year with full year expense guidance in the low $140 millions range. Given our updated guidance, we are tracking to the high $130 millions and expect to improve on this as we move into 2017. In fact, this updated full year expense guidance in the high $130 millions compares very favorably to last year where expenses totaled $158 million, and the adjusted 2015 run rate operating expenses totaled $147 million.

  • The fully taxable equivalent tax rate came in at 31% for the second quarter, and we expect a similar tax rate for the remainder of 2016. Capital ratios remain strong with $110 million in excess capital using a 9% leverage ratio as a target.

  • As we shared with you in last quarter's call, we were pursuing a few attractive opportunities that have yet to transact. Quite frankly, the lack of a currency in this market has made it extremely difficult to compete for mergers. And it does not make sense for us to issue our shares into a high-dilution and long payback transaction. Driving our organic growth strategy will yield better results over time, which will provide more financial flexibility in the future. Alternatively we continue to buy in our shares at attractive prices. As of last night, we have $21.5 million remaining from our prior share repurchase authorization.

  • Tim, that concludes my comments.

  • - Chairman, President and CEO

  • Thank you, Brian. Brian and Rick have done a nice job of covering the quarter so why don't we go ahead and open up the line for questions.

  • Operator

  • (Operator Instructions)

  • Your first question comes from Chris McGratty from KBW.

  • - Chairman, President and CEO

  • Good morning, Chris.

  • - Analyst

  • Hey, Tim. Hey, Brian. Quick question on the growth. Last quarter you sounded optimistic about some lift-outs. What's the latest there?

  • - Chairman, President and CEO

  • We have just announced a new leader for a Dallas-based team. We have been doing some work in the restaurant and beverage franchise space, and we'll continue to pursue opportunities on other fronts. But, make no mistake, our primary focus has been on growing commercial business in our core markets.

  • - Analyst

  • So this leader in Dallas, is that what you guys may have been talking about, or is there something more material that might be coming?

  • - Chairman, President and CEO

  • There's more material. We're just at a stage, Chris, where I'm reluctant to say much more.

  • - Analyst

  • Okay.

  • - Chairman, President and CEO

  • I will say this, and Brian alluded to it. Our pipeline, as we entered the third quarter, set a new record high, and we've had the best start to a quarter in our young company's history as it relates to new commercial clients and new loan production here at the start of the third quarter. So we feel pretty good about the progress our teams are making.

  • - Analyst

  • Understood. Thank you.

  • Brian, on the margin outlook, certainly it bumps around, but you still have a decent amount of accretable that will run through, my guess, over the next couple of years. What's the longer term high level thought on the margin given what you're doing with the mix of the balance sheet, putting securities into loans but also battling that headwind? What's the long-term trajectory of rates to here?

  • - CFO

  • As we mottled it out, Chris, we certainly get to that level, and the mid maybe just shy of the mid 3s. But the depressed lower interest rates, some of the market pricing, we'd have to see loans in the higher 3s. And we're seeing a lot of that happening, but it would be nice to get a little bump out of the interest rate environment to ensure that, but longer term that's where we see it settling is out with the pluses and minuses and remixing of the earning assets.

  • - Analyst

  • So a little under 3.5, is that right?

  • - CFO

  • Yes.

  • - Analyst

  • Okay. Thanks for taking the question.

  • - Chairman, President and CEO

  • Thank you, Chris.

  • Operator

  • Your next question comes from Matt Olney from Stephens.

  • - Chairman, President and CEO

  • Hi, Matt.

  • - CFO

  • Hey, Matt.

  • - Analyst

  • Hey. Good morning, guys. How are you?

  • - Chairman, President and CEO

  • Good, thanks.

  • - Analyst

  • Going back to Chris' last question. Can you talk more about the interest rate outlook and if we are here lower for longer on rates, what does this mean for your strategy? Is there anything else you can tweak in respect to your securities book or deposits or the type of loans that you're looking for? Does anything change at all?

  • - Chairman, President and CEO

  • Well, I would suggest that the entire management team and Board are looking forward to transitioning the remaining low yielding investment portfolio into quality client loans. So, that's an opportunity that is somewhat unique for us given the size of our current securities book, and we do, as we talk about, we've allowed ourselves to begin to do a little bit of CRE, although it's within very constrained house limits, so we'll see better spreads there, some of the specialty businesses that we're getting ourselves up to offered better spreads to the very point of your question. But I think first and foremost, transitioning the remaining investment portfolio into quality client loans is a big, big driver for us.

  • Brian, what would you add?

  • - CFO

  • Matt, I think Tim covered it well. I would only add that probably like many others, we think about the variable versus fixed rates and taking maybe some additional interest rate risk.

  • But quite frankly, we've concluded on the side of given our makeup and some of the fixed rates we already have in a number of the purchased portfolios that we still feel pretty good. This quarter we threw up another 70% variable rate in our loan pricing. All in, it was 3.6%.

  • If we were to go out longer we could get more. But I think in this uncertainty we're playing it smart by shifting out of the investment portfolio into loans for the short period of time. And maybe we'll look at it lower for longer has been talked about for the last decade, right. So we'll see what comes around the corner.

  • - Chairman, President and CEO

  • The challenge is, the reward for going fixed just isn't there today. So if that shifts, obviously it's a different consideration. But we don't see the reward for the risk at this point.

  • - Analyst

  • And that securities book, I believe, right now is about 34% of the earning assets. Is there a target level or at what level do you think we'll start to bottom out on that securities book?

  • - Chairman, President and CEO

  • Oh, I think around your 15%. And even lower. You build it from the bottom up, based on your liquidity needs and any kind of secured positions that you're putting out there on deposit, and that just hasn't been a big driver for us. So I could see 10% to 15% as where the eventual is. It takes us awhile to get there.

  • - Analyst

  • And on the loan growth front, you guys noted of what a strong quarter it was, even despite some of the energy headwinds. How many more quarters are we going to see the energy head winds as it relates to loan growth for you guys?

  • - Chairman, President and CEO

  • The leader of our team really believes we've begun to stabilize and with some of our better credits we could actually see some expansion. So we're somewhat cautious in responding to, again, a very good question, but we would like -- we would like to believe the debt portfolio has now stabilized in terms of balances. Rick spoke to the quality of the remaining clients in that portfolio, and that's probably the best answer we can give you right now.

  • - Analyst

  • And in that energy reserve that you guys mentioned earlier, do you have the amount that's allocated towards specific credits versus just a general energy reserve?

  • - Chief Risk Officer

  • Sure, Matt. This is Rick. On the $25.8 million, it's roughly 50% coverage. So right in that range, the balance being general provision, or general allocation.

  • - CFO

  • I think our general is still around 3.5% of the $75 plus million good credits, past credits.

  • - Analyst

  • Okay, guys, thank you very much.

  • - Chairman, President and CEO

  • Thank you.

  • Operator

  • Your next question comes from Tim O'Brien from Sandler O'Neill. Please go ahead.

  • - Chairman, President and CEO

  • Good morning, Tim.

  • - Analyst

  • Good morning, Tim. So most of my questions were actually asked, but did you purchase any loans this quarter?

  • - Chairman, President and CEO

  • What's the --

  • - CFO

  • We participated.

  • - Chairman, President and CEO

  • No portfolio was purchased or anything of that nature.

  • - Analyst

  • How much was -- and did you lead on the participations, or were you second?

  • - Chairman, President and CEO

  • It's always a mix with what we do, right? It's reciprocal.

  • - Analyst

  • Absolutely.

  • - Chairman, President and CEO

  • We do some. We participate in some.

  • - CFO

  • But it's dominated by our own originations, Tim. The participations are a minority of that.

  • - Analyst

  • And then I didn't see a utilization rate on your operating line, book of operating lines. It might be in there, but I missed it. But did you guys give that number?

  • - Chief Risk Officer

  • We didn't, Tim. This is Rick. We've stayed, other than energy, pretty consistent in the mid to upper 40%. On the energy side utilizations have come down much lower than that.

  • - Analyst

  • And then as far as loan pricing is concerned in the marketplace, I know occasionally when there's low rates or something, or coming in towards year end, second half of the year, some of the big banks will run pricing specials and such and try to fill some buckets. Are you seeing any of that kind of activity and aggressive -- particularly aggressive pricing in any of the areas that you are trying to generate business in?

  • - Chairman, President and CEO

  • You know, interestingly enough, while we felt -- started to feel some pressure on pricing this time last year, we've actually seen pricing work back a bit more favorably on the lending front. Of course what we're cautiously aware of is the large banks getting to a point where they do begin to price up their deposit products for greater liquidity, but that's why we're incredibly focused on landing the transaction accounts, the operating accounts of our clients, that stickier deposit business.

  • - Analyst

  • Thanks for answering my questions.

  • - Chairman, President and CEO

  • Hey, thank you.

  • Operator

  • I'm showing no further questions at this time. I will now turn the call back to Mr. Laney for his closing remarks.

  • - Chairman, President and CEO

  • Well, I just would like to thank everyone that's attended the call this morning. Thank the analysts for your questions and wish everybody a good day and a good weekend. Bye now.

  • Operator

  • 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 two hours and will run through August 5th, 2016 by dialing 855-859-2056, or 404-537-3406 and referencing the conference ID of 92236155. The earnings release and an on-line replay of this call will also be available on the company's website on the Investor Relations page. Thank you very much and have a great day. You may now disconnect.