National Bank Holdings Corp (NBHC) 2019 Q1 法說會逐字稿

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2019 First Quarter Earnings Call.

My name is Mariama, 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 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 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 Chairman, President and CEO, Mr. Tim Laney.

Thanks, Mariama.

Good morning, and thank you for joining National Bank Holdings First Quarter 2019 Earnings Call.

I have with me our Chief Financial Officer, Aldis Birkans; and Rick Newfield, our Chief Risk Management Officer.

I'll begin by thanking my teammates for their continued focus on building full relationships with our clients.

We genuinely believe in creating win-win solutions for our clients and our bank.

And the results are positive.

We're off to a solid start with record quarterly earnings of $0.60 per share.

Our focus on providing fair and simple solutions, while offering uniquely personal service, fueled annualized loan growth of 16.3%.

Equally important, the loan growth continued to be very diverse and granular in nature.

This has translated into solid credit metrics with annualized net charge-offs of just 2 basis points.

With the growth of full client relationships, we realized spot transaction deposit growth during the quarter of 20.9%.

Notably, we saw our noninterest-bearing demand deposit to total deposit mix actually improved during the quarter.

Now if there was a negative for the quarter, it was the delayed closing of some of the previously acquired OREO.

We actually absorbed the bulk of the related OREO expense during the first quarter but now do not expect to realize those gains until the second or possibly, the third quarter of this year.

So on that note, I'll turn the call over to Aldis to cover the quarter in more detail.

Aldis?

All right.

Thank you, Tim, and good morning.

As Tim mentioned, we are very pleased with our record earnings of $18.9 million for the first quarter of 2019 and record earnings per diluted share of $0.60.

Our earnings results were driven by expanding net interest margin, strong loan and deposit growth, which resulted in a net -- in a solid net interest income increase, along with low credit costs and continued focus on expense management.

After the first quarter's results, we are happy to reaffirm our full year 2019 guidance that we provided on the last call.

And as always, our guidance does not include any future interest rate policy changes by the fed.

During the first quarter, we outpaced our planned loan growth by growing the originated and acquired loan balances at a solid 16.3% annualized rate.

The growth during the quarter is a continuation of the strong momentum built during the latter part of 2018 and continues to be well balanced across various asset classes, geographies and industry sectors.

The first quarter's loan fundings were $311 million or 49.3% higher than the same quarter last year.

The newly originated loan fully taxable equivalent rate was 5.4%.

This year is off to a great start, and our loan pipelines look strong.

As a reminder, our full year loan growth guidance was 8% to 10%.

And after the first quarter's strong performance, we feel comfortable guiding towards the upper end of this range.

Of course, we are mindful of the broader shift in the economy and the flat yield curve.

But at this point, our markets continue to perform better than the national averages and while our clients remain cautious, the client activity is strong.

Turning to deposits.

Our first quarter's average transaction deposits were essentially flat on a linked-quarter basis.

We are happy with the progress we've made in our commercial, small business and retail clients to grow our relationships as measured by the noninterest-bearing checking account balance growth, which increased 1.4% on a linked-quarter basis and 4.8% over the same quarter last year.

We are seeing good momentum in our deposit strategy and the transaction deposit balance growth has picked up throughout the quarter as evidenced by the spot transaction deposit increase of $178.3 million or 20.9% annualized on a linked-quarter basis.

I'm also pleased to report that our loan-to-deposit ratio remained flat to the prior quarter at 90%.

The first quarter's transaction deposit cost was just 35 basis points and, as we had guided before, increased 4 basis points on a linked-quarter basis as the 2018 rate hikes continue to work their way through the deposit base.

The total cost -- deposit cost was 58 basis points.

For the rest of 2019, we are reaffirming our full year guidance for transaction deposit growth in the mid-single digits with time deposits staying relatively flat resulting in the full year total deposit growth in the low single digits.

The fully taxable equivalent net interest income totaled $52.4 million and increased on a linked-quarter basis despite 2 fewer days in the quarter.

This is a result of strong fourth and first quarter loan growth as well as an expanding net interest margin.

During the quarter, our fully taxable equivalent net interest margin widened 6 basis points to 4.05%.

Looking ahead, similar to last year, we expect a residential mortgage held-for-sale portfolio to increase during the summer months, thus putting downward pressure to the second and third quarter net interest margin calculations.

As such, we are reaffirming our prior guidance for fully taxable equivalent net interest margin to remain slightly above 4% for the rest of 2019, and we project no change to our targeted year-end earning asset levels of $5.3 billion to $5.4 billion.

We are also off to a strong start relative to loan quality.

Provision for loan loss expense was $1.5 million for the first quarter driven by the strong originated loan growth.

Net charge-offs for the quarter were just 2 basis points annualized, and the outlook for asset quality remains favorable driven by our disciplined adherence to our self-imposed concentration limits and our credit underwriting standards.

For the next 3 quarters of 2019, we are guiding our provision expense to be in the range of $9 million to $10 million as we expect to cover both the future originated loan balance growth at 1.1% to 1.2% coverage and net charge-offs for the remaining 3 quarters at about 15 basis points annualized.

The first quarter's noninterest income of $17.1 million was $1.7 million higher than in the fourth quarter 2018.

The linked quarter increase in noninterest income was primarily driven by the residential mortgage gains on loans sold.

And with increasing seasonal residential mortgage activity during the summer months, this puts us on a path to achieve the full year noninterest income guidance of $70 million to $72 million.

Regarding expenses, our first quarter's noninterest expense totaled $44.4 million and increased $1.5 million from the prior quarter.

The linked quarter increase was primarily driven by a $0.9 million seasonal increase in salaries and benefits due to higher commissions and payroll taxes as well as $0.5 million higher problem asset workout and OREO expense.

However, as we have mentioned previously, we expect OREO gains later this year to offset the problem loan and OREO expense is realized for the full year.

Reiterating our noninterest expense guidance, we still expect our full year expenses to be within the previously guided $182 million to $185 million range.

The Utah expansion initiative, annual merit increases as well as the seasonal increase in mortgage activity will lead to higher compensation expense in coming quarters.

As always, we continue to focus on improving our efficiency, and we will aim to come in at the lower end of this range.

The effective tax rate for the quarter was 15.1% and included $0.8 million benefit related to stock compensation activity.

Excluding this, the effective tax rate for the quarter was 18.5%.

For the rest of 2019, we expect the effective tax rate to be in the previously guided 18.5% to 19.5% range.

As it relates to capital, we finished the quarter with 10 -- with a 10.6% Tier 1 leverage capital ratio and the tangible book value per share increased to $19.31 driven by our record earnings.

Tim, that concludes my comments.

Thank you, Aldis.

Aldis has covered in detail what I believe was a strong quarter.

So I'll go ahead and open up the call for questions and, Mariama, ask you to open up the lines.

(Operator Instructions) Your first question comes from Jeff Rulis with D.A. Davidson.

Yes.

I was hoping, Tim, just to get an update on the Colorado M&A scene.

You had lots of activity in 2018 and, I guess, had been quiet of late.

Just want to check in with you on discussions of late or, kind of, within the market what you're hearing?

The -- we want to continue to focus on being intelligent stewards of capital.

I will say if you look at our entire footprint, we are seeing opportunities.

We're primarily focused on privately held institutions.

We enjoy working with what we consider to be savvy sellers who appreciate the opportunity to strike an intelligent deal that upon announcement will be well received by the marketplace, recognizing that if they're taking our shares and we're announcing a smart deal, then they're going to see those shares trade up day 1. So day 1 premium is not as important necessarily as the shares they're going to hold long term.

Working with private owners of banks that have the flexibility and the foresight to work that way has paid off for prior partners we've worked with, and we think it will pay off for future partners.

So I can't say much more than that, but we will continue to confine ourselves to the kind of returns and earn back standards that we've held ourselves to in the past.

Okay.

And maybe just a related -- trying to get a pulse on your feel on the, kind of, out-of-market entrants.

And then, kind of, the second part of that question is are you seeing any shakeout from deals -- I'd focus more on Colorado but even in New Mexico and Kansas City, call it, where there's been some deal activity, are you seeing some shakeout?

And again, what do you think the appetite, has it slowed from out-of-market entrants from your perspective?

Well, I -- as Aldis mentioned in his comments, we continue to benefit from operating in some of the better-performing markets economically in the United States.

And so there continues to be a great deal of interest from outside parties in these markets.

I think that's -- for obvious reasons, I think that's smart on their part.

As it relates to the first part of your question and the shakeout, frankly, we continue to benefit most from the opportunities we see from the larger institutions.

And I'm talking about the larger 3 or 4 institutions.

And that shouldn't really surprise folks.

If you look at their historical market share, the kind of change that tends to go on in those institutions, we should be taking market share there, and we are.

So that's our opportunity and that's what we're working to take advantage of.

Okay.

Maybe last one.

Just on capital then.

You're seeing some of the highest capital levels in about 1.5 year here, and you've seen the dividend hiked up a bit in the last few quarters.

Just wanted to kind of get your capital deployment maybe waterfall or priorities, I guess, funding organic growth but then you look into dividend.

Anything else you're looking for as far as deploying capital?

Just anything there?

Well, I think you nailed it with the first 2 points.

Certainly first and foremost, funding organic growth; second, continuing to support ideally a semi-annual dividend increase; third, being opportunistic with M&A; fourth, recognizing that we are long in this cycle, and we believe that if we are fortified going into some kind of downturn, when and if that happens, that, that will bode well as it relates to opportunities on a downturn.

On a related note, I'll -- if no one asks, I'll ask Rick to talk about the way we view our loan book and the way we stress test our loan book and view it in a severe stress scenario.

I think a strong capital base coupled with the balance sheet we've built or more specifically, the loan book we've built, I think positions us well to take advantage of a downturn.

So that's how I would break it down.

Your next question comes from Tim O'Brien with Sandler O'Neill + Partners.

Just to follow up on the comments you made about the bulk of expense hitting on the OREO disposition and the benefits coming in, in the second or third quarter.

Could you give a little more -- can you share some detail on that, Tim, kind of, what -- that's a curious set of circumstances there.

I'd love to hear a little bit more about that and, I guess, what it might mean as far as operating expense or where the gains are going to book, what line that's going to show up and get a little more detail there?

Yes, Rick, do you want to take that?

Sure.

Tim, it's Rick.

Look overall, we've said this for some time and evidenced it in past years, OREO remains a profit center for our company.

We've actually had several OREO properties under contract for some time with very nice gains.

As Aldis said, we expect those gains to do no less than cover the full year's OREO and problem loan expenses.

As we've said before, they're lumpy.

And as Aldis indicated and Tim alluded to, we would see those gains second and third quarter here.

And again, that's probably the most detail I can share other than they are significant gains that we would realize.

And of course, Rick and Aldis are approaching that conservatively as I've asked them to, Tim.

You know this, Tim, and those that have followed us for some time know this.

But for those that may be newer to the name, I just want to remind everyone that what we're talking about here are -- is the OREO that came out of acquired problem institutions.

So when Rick talks about it as a profit center, these were deeply discounted loans in OREO, and net-net economic returns on these assets have been tremendous.

And when I look at the landscape over the course of 2019, I see a nicely accretive position to capital.

Again, we're not talking about core earnings, just to be clear.

But when I think about it in terms of just the contribution to capital, building on the prior discussion, I see a nice contribution over the second and third quarter.

What we're talking about, to be very specific, is the resolution -- the final resolution of some fairly meaningful pieces of property being sold that have been held for some time.

And the booked value of that property, as you're carrying it now, is that -- that's $9 million?

Our total OREO is just over $9 million.

We're talking about a subset of those properties that are under contract and are positioned for very nice gains.

Got it.

And then just changing gear, one last question.

Trailing 4 quarters before this quarter, growth in noninterest-bearing DDA was much less substantial than this quarter's growth.

That was, kind of, in my view a highlight of -- one of the highlights of several, obviously, of the quarter.

Could you give a little bit of color on what was behind that?

And if that's indicative of prospects here going forward in that area?

I'll ask Aldis to fill in with a little more detail, but I will remind folks that I talked about a number of relationships closing in the fourth quarter.

And there tends to be, as those relationships close, a trailing period for all of the treasury management and operating accounts to come online.

So part of what you saw in the first quarter was the benefit from fourth quarter activity as well as a stronger-than-expected first quarter.

Having said that, Aldis, any additional color you would add?

That's exactly right.

It's the relationships that we've been mentioning about and working on for several quarters now.

Obviously, we continue working on new ones and growing that part of the deposit book on a go-forward basis as well.

But there is -- this was -- this quarter was a combination of relationships that we closed and started funding in from the quarters before as well as new people and new accounts being brought on.

It just gives me the opportunity, Tim, to thank my teammates again for their focus on really serving the full relationship with our clients.

And I think one thing that we're doing uniquely well with our incentive systems that really reward our bankers for growth and direct contribution, which is a proxy for net income, which is the way we all reward ourselves as shareholders is they're recognizing that they can grow that direct contribution just as strongly and at times even more robustly with the growth of treasury management and deposit business than they can with loan business, certainly on a risk-adjusted basis.

So having that kind of alignment of incentives with the growth of full relationships continues to be a strong force for us.

But I -- again, I'll just thank my bankers for their focus on serving the full relationships of our clients.

Your next question comes from Chris McGratty with KBW.

This is actually Kelly Motta on for Chris.

Just a point of clarification.

Your fee guidance for the year, is that inclusive of the expected OREO gains you anticipate realizing later this year?

It is not.

So the fee guidance -- the OREO gains actually go with the counter expense in the expense line item.

So these fees are excluding the OREO.

Okay.

All right.

And then I was hoping to get an update on the Utah expansion, maybe some more color there on how that's progressing.

Right.

Thanks for asking.

We -- I think we're actually stunned with the momentum there.

We -- I'm pleased to report that Utah contributed to our first quarter earnings off to a very solid early start and could not be more proud of the leadership there, and we just couldn't be happier.

I will say, consider this kind of a public service announcement, if there was an opportunity to make the right acquisition in that market, if there are interested sellers, we are interested in creating the right partnership there.

We would love to help invest in the growth of the state of Utah.

Well, that's good to hear.

Maybe a last question on your margin outlook.

It hasn't changed because I believe you didn't have rates in your prior outlook.

Just wondering with the proportion of loans you have that are variable, if you've taken any steps to mitigate downside risk with the possibility of the Fed not moving or cutting rates later this year.

This is Aldis.

It's a great question.

We've been actually working on that for over a year now in mixing loan -- marginal loans coming on at more of a fixed rate than variable rate.

And what I'm talking about is more of a 3- to 5-year fixed-rate loans as opposed to anything longer than that.

And we've been bringing down our asset sensitivity in the light of the rate hike environment coming to an end for over a year, and we'll continue working on that this year as well.

Your next question comes from Nathan Race with Piper Jaffray.

It's actually Bob Shone on for Nate.

First question is, can you maybe talk a little about what were the primary contributors to the mortgage banking pickup this quarter and maybe anything you see in the marketplace going forward?

Yes.

We just simply saw a higher level of locks of better activity in the quarter earlier on than we expected.

I mean, keep in mind, the way we think about residential banking is we expect -- our challenge to the team is to break even or better in the fourth and first quarters and to really make our money to deliver our profits for the year in the second and the third quarters.

But Aldis, you may want to speak in more detail as to not only what we saw in the first but the early activity we've seen as we've entered the spring.

Yes.

And to that point in the first quarter, we are actually happy to report that mortgage was -- mortgage business was accretive to our earnings this quarter as well.

So they're better than breaking even.

They added to the value of the company.

And will be starting off April here in a strong note, I think the lower rate environment is obviously helping on the mortgages.

But as a reminder, again, we are in very good markets, especially here in Colorado, for purchase mortgages.

So it's always easier to swim with the tide than against it.

And then maybe can you talk a little about the loan pipeline as we head into 2Q, especially after a strong first quarter?

Are there maybe any areas that you see as stronger or weaker?

Look, the good news is we feel good about our pipeline and activity as we roll right into the second quarter.

And Bob, I'll -- since I think it came up in your report, I'll actually make one point of clarification as it relates to the diversity of the book.

I think you guys may have pointed to kind of a heavier concentration in CRE.

I would point out and, Rick, you can jump in here, as a practical matter, a bulk of what we were talking about in terms of growth in that CRE book in the first quarter was actually owner-occupied.

Furthermore, to put it in perspective, year-over-year, we actually saw our nonowner occupied CRE decline, I think, what, Rick, around 8%?

8%.

8%.

Furthermore, I think this brings it home at first quarter in our commercial real estate to total cap is right around 100%, what?

Is it 101%?

101%.

101% versus a regulatory guideline, of course, of 300%.

So I just want to -- I want to stress that we continue to be very focused on building a diverse granular book.

With that, Rick, anything you would add in terms of the dimensions around what you're seeing in the pipeline today or what you saw in the first quarter?

Yes.

I mean, I think, an important point on nonowner-occupied commercial real estate, we continue to build strength.

As you know, Tim, in business banking and really granular small business loans and expect, based on pipelines, to have an even stronger second quarter in that area.

In the past, I've talked about overall granularity, including generally been around $1 million per funded commercial loan.

Actually, we're more granular in the first quarter, about $700,000.

So again, I just would echo the comments you made.

Our criticized and classified loans continue to trend down during the first quarter.

And I mentioned earlier the stress testing, maybe at a high level, you could explain -- we're now into our third year, while not required by the regulators, we run with a third party, the equivalent of the regulatory required stress testing.

You may want to talk about preliminary results we're seeing from our third year of stress testing.

Sure, Tim.

And as you said, we're not required to do this.

We actually do one internally through our quarter review team.

And then use a variable -- we can serve very conservative and tough third-party to come in and do an annual test.

They look at a significant portion of our commercial and business banking portfolio.

It's a bottoms-up approach.

And for the second consecutive year, they've actually seen a derisking, a decrease of overall loss rates, ranging from a base case all the way to a very severe case.

And at a high level, we do that again.

To understand our optionality and the strength of our balance sheet if we go into that very severe case, which from their assumptions would be at or more severe than what we saw in the Great Recession.

Yes.

Thank you, Rick.

Bob, I hope -- that maybe given you more than you asked for but I wanted to get that in.

That is all the time we have for questions.

I will now turn the call back to Mr. Laney for his closing remarks.

Well, I certainly don't want to limit any questions.

So Mariama, I'll just check and make sure there are no other questions in the queue.

Yes, we have a question from Jeff Rulis with D.A. Davidson.

Tim, on the -- I just wanted to clarify a couple of items.

Aldis, you mentioned -- was it the average earning assets that you said was $5.3 billion to $5.4 billion?

Period end, $5.3 billion to $5.4 billion.

So by year-end, our earning assets will be $5.3 billion to $5.4 billion.

And the reason I gave that guidance, just to be very clear again, the mortgage held-for-sale portfolio tends to increase during the summer months, right?

And I don't want anybody to take that as a continuation as we will build that book here in second and third quarters.

It will come back down, and that's why it's so -- I'm giving such precise guidance towards the end of the year.

No.

Very helpful.

Appreciate it.

And then just to clarify on the -- I guess on the noninterest expense, just the -- again, the problem workout expense you expect for the full year to be fully offset by OREO gains and both factors would be included in your $182 million to $185 million noninterest expense guidance?

That's correct.

Those 2 line items netting to 0, at least to 0, if not being a negative value or positive to the reducing expense.

Gains exceeding the workout cost?

Exceeding the workout costs.

And Jeff, I would just add that while I had no intent to overpromise, I think you can look at our track record on doing better than playing against expenses, and I certainly have high expectations of ourselves here in 2019.

Got you.

You're in the hole by $800,000 or so, and so I guess it's going to be a more positive picture in the closing quarters.

I am showing we have no further questions at this time.

Okay.

Great.

Then I'll just simply thank everyone for joining us this morning, and we'll be back to you with second quarter results shortly.

Thank you very much.

Good day.

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 May 8, 2019, by dialing (855) 859-2056 or (404) 537-3406, and referencing the conference ID of 8699564.

The earnings release and an online 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.