National Bank Holdings Corp Q4 FY2020 Earnings Call

Good morning everyone and welcome to the National Bank Holdings Corporation 2020 Fourth Quarter Earnings Call. My name is Mariama, 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 prepared remarks. 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, but not limited to, statements regarding the company’s strategy, loans, deposits, capital, net interest income, non-interest income, margins, allowance, taxes and non-interest expense. Actual results could differ materially from those discussed today.

Thank you, Mariama. Good morning, and thanks for joining National Bank Holdings fourth quarter and full-year 2020 earnings call. I have with me our Chief Financial Officer, Aldis Birkans; and Rick Newfield, our Chief Risk Management Officer. I’m pleased to report record full-year earnings of $2.85 per share, growing tangible book value by $2.20 during the year to $23.09 per share. In the face of unprecedented pandemic-related challenges, my teammates came together to serve our clients and communities while taking care of each other. We continue to benefit from having strong banking teams operating in high-performing U.S. markets. We believe our relationship banking model, coupled with a disciplined focus on building a diverse and granular loan portfolio, bodes well for our future. Now under CECL, we built approximately $17.6 million in additional provision for loan losses during 2020 while realizing actual net charge-offs of just $2.7 million, or only 6 basis points of total loans. We actively supported our client engagement in the Paycheck Protection Program, and to date, we've helped over 75% of our participating clients engaged in the forgiveness process. Before turning the call over to Rick, I want to thank my teammates for their intense focus on realizing solid growth while, at the same time, prudently examining every opportunity to increase our productivity.

Thank you, Tim, and good morning, everyone. I'll cover two areas in my comments. First, I'll briefly summarize our asset quality trends during 2020. Second, I'll describe the actions we continue to take to reduce risk on our balance sheet and position our company to navigate sustained economic uncertainty while working to prudently support our clients. Despite the unique challenges presented by the COVID-19 pandemic, our asset quality remains strong during 2020. This is demonstrated by our ability to reduce non-performing assets by 13.5% during the year, with a non-performing asset ratio of 0.60% at December 31, 2020.

Thank you, Rick, and good morning. In my comments, I'll provide an update on our financial results and give guidance for 2021. For the fourth quarter, we reported $0.87 of earnings per diluted share, and we finished 2020 with another year of record annual earnings of $2.85 per diluted share. When adjusted for this year's banking center consolidation expense, the full year EPS was a record $2.91. The fourth quarter’s loan production was $272.5 million, which was double that of the loan production in the third quarter, and a 1.1% increase from the loan production during the same quarter in 2019. The loans outstanding this quarter decreased by $202.4 million, and $172.2 million of that decrease was driven by successful Paycheck Protection Program loan forgiveness efforts. As of December 31, we had received forgiveness proceeds on 50% of the original outstanding PPP balances. Depending on the SBA’s process and timing, we expect the majority of the remaining balances for loans from 2020 to be forgiven during the first half of this year. We are seeing a solid economic recovery in our markets, but at this point, even with the COVID vaccine being rolled out, we feel it is too early to provide any forward-looking loan growth guidance. The solid deposit growth trends from the summer continued into the fourth quarter as our average fourth quarter transaction deposits grew by $172.1 million on a linked-quarter basis, representing a 15.3% annualized increase. The total cost of deposits decreased by 7 basis points to 33 basis points, and our transaction deposit costs decreased by 3 basis points to just 15 basis points in the fourth quarter of 2020.

Thank you, Aldis, for covering a lot of ground there. We believe our strong capital and liquidity levels enable our bank to operate from a position of strength. Our risk management policies and practices continued to produce desirable results. And to that end, yesterday our board moved ahead of schedule to approve another increase in our quarterly dividend. We believe we're well-positioned to consistently deliver a solid dividend while growing our tangible book value and delivering an attractive total shareholder return. And on that point, Mariama, I'll ask you to open up the call for questions.

Thank you. Your first question comes from Levi Posen with D.A. Davidson. Your line is open.

Hey, good morning Tim, Aldis, and Rick. This is Levi on for Jeff Rulis.

Great, Levi.

Thinking about your loan growth appetite and granular loan book, can you share your philosophy about returning to growth? Does that happen across the loan book at the same time, or are there segments that you may turn on sooner than others?

Right. So, I think it is important to note that in the fourth quarter of last year we saw a return to our historical levels of loan production, and that is an indication that we have opened our doors, so to speak. I think your question is good as it relates to segments that we might be more careful with. Those that are obvious are certain real estate sectors that we really had little to no exposure to in the first place, but you're talking about areas like retail and office, and again, we're fortunate that those just aren't areas we had much exposure to.

Thanks, Tim. That's helpful. And then just one on capital, can you give some color on your mindset related to the buybacks?

Yeah, it's interesting. Given our view on the strength of our prospective future earnings, and this continued growth in our tangible book value, we're having to adjust the target number up quite a bit in terms of where we see value in buying our shares back. And Aldis is continually sharing with me that target increase, and so I'm going to tell you buybacks are not off the table. To the extent that we are fortunate enough to engage in some fill-in M&A over the course of this year, that might very well be done in conjunction with some buybacks.

Yeah, absolutely. Appreciate it. That's it from me. I'll step back.

All right, thank you.

Your next question comes from Kelly Motta with KBW. Your line is open.

Hi, Kelly.

Hey, Tim, Aldis, and Rick. Thanks for the question. I think I'll continue on and roll with the M&A topic that we left off on. I'm just wondering, it seems like the M&A conversations have picked up quite a bit as things have gotten a little bit more certain economically. Just wondering if there is kind of any change in the outlook now versus the last quarter, and kind of your view on the pulse of the M&A market as we look to 2021?

Yeah, I'll share with you and our investors the posture and the position I've been sharing with our board, and I believe it's appropriate at this point to be looking at acquisitions really on two fronts. The first, I would describe as current market opportunities, where the synergies just make all the sense in the world. Probably more in that $1 billion range, but where we know we could create tremendous value for those institutions and certainly create great value for our investors. Those may sound a bit more tactical, but they are extraordinarily important, and we've had a fine history of being able to deliver strong returns for everybody involved out of those kinds of actions. The other I would describe as more transformational, and that's where we look at opportunities that would significantly improve our profitability and opportunities to leverage greater scale. Frankly, there is even a third we’ve talked about. We continue to look at some really interesting opportunities to leverage some of our capital into the digital space. That's both in the payments arena, in the security arena, leveraging our very strong treasury management capabilities. That’s something that we'll continue to work on as part of our strategic vision. So, I would say market opportunities, transformational opportunities, and investment in opportunities to redefine parts of our business in the digital space.

Great, that's great color. Thanks, Tim. Maybe just turning to expenses. In the past, you've given some details on the expenses related to mortgage. During the quarter, I know they had been running with better efficiency ratios of higher gains on sale the past couple of quarters. I’m just wondering what the expense contribution was in mortgage this quarter to back the core bank versus mortgage operations?

Yeah, I'll turn it to Aldis for the detailed answer to that question. But I do want to compliment you. I noticed in your first look, you picked up on what's happening with our focus on operating leverage and what I'm most excited about is, once Aldis answers the question around stripping out the mortgage run rate, is what we're doing in our core run rate. A lot of the attribution for that reduction in core run rate is always talked about as being related to the banking center consolidation. On that note, I would say what's really exciting is that our digital conversion rate in that process is stronger than we expected. More importantly, our retention rates of clients in that consolidation process have outperformed even our highest expectations. But here's the real point there, while we tend to attribute a lot of that expense savings to the consolidations, I have to give my teammates across the entire company credit because we're looking at opportunities every day to improve all of our processes and throughout the bank to bring core expenses down. Our teams have done a great job there and continue to look at opportunities to be more efficient. So, I'm going to take your question as an opportunity to thank my team for their focus on productivity and just make the point that we're going to continue to see efficiency gains coming out of more than the banking center consolidations. Now Aldis, you can finally answer Kelly's question.

Thanks, Kelly. Hi, good morning. To further Tim's point, in our guidance of $182 million to $192 million, embedded in there in terms of the core efficiency is about $8 million improvement in run rate from 2020 into 2021. That kind of strips out all of the mortgage commissions in there. Now, specifically to your question, you're right, the mortgage has been running at an efficiency that's better than long-term averages that we've seen, and the industry has seen. Typically, in the fourth quarter, it is around 35% to 40%. In the fourth quarter, it was around 30%. So, it gives you a bit of a guidance in terms of how efficient that business has been.

That's really helpful. Thanks a lot, I'll step back now.

Yeah, and I'm sorry, I just want to correct one thing in terms of the percentage that I gave, that percentage to gain on sale, not percentage to salaries and benefits.

Got it, thanks.

Thank you, Kelly.

Your next question comes from Andrew Liesch with Piper Sandler. Your line is open.

Good morning, Andrew.

Hey, it's actually Michael Hultquist on for Andrew.

Michael.

Kind of following up on expenses here, looking into this quarter, how much should that line item rise due to seasonal higher payroll taxes and bonus accruals?

It shouldn't rise at all on bonus accruals. I mean, we're accruing for 2020 bonuses that have been accrued fully in 2020. So, there is no increase on that. There is a payroll impact certainly in the first quarter that is somewhat offset by a fewer business days in the quarter. So, I would say there is not necessarily a meaningful impact or difference between the quarters from bonus or payroll impact.

Okay, that's helpful. And then switching gears here, liquidity is certainly going to be the wild card as with many of the peers, but have you seen any deposit trends so far this quarter that would suggest less excess liquidity going forward and maybe continued margin expansion?

No, I think encouragingly we've seen quite the opposite. Deposits have continued to build, and I view that as a positive in building our core franchise and in building the liquidity. It just pre-funds that loan growth that we talked about, and really that becomes very accretive to both margin and net interest income because the loans have been pre-funded.

Not only growing, but growing while we've eliminated a number of interest-bearing deposit products, seeing very solid retention in our core operating accounts, and seen great traction, this isn't talked about enough, tremendous traction in our treasury management arena. The growth with business relationships has seen a lot of that business come from larger institutions, and that's a trend that we're really excited about.

Okay, that's terrific. Thank you for taking my questions. I'll step back.

Of course, Michael, thank you.

And your next question comes from Kelly Motta with KBW. Your line is open.

Kelly.

Hey, sorry to hammer with the expense question, but just want to make sure I got the moving parts of my model right. With the seven banking center consolidations that you have upcoming, how should I be thinking about the cadence of those expense savings coming in? When will they be completed?

We don't expect to get them completed until the end of the second quarter. So really the $2.2 million expense save that we referenced in the press release on consolidation is expected to start taking place in the second half of this year.

Yeah, important question.

Got it.

Yeah, no, thank you for asking. That's an important clarification.

And then just a minor housekeeping thing with the tax rate, is this kind of like 18%, 19% a good approximation for next year to go with?

It is, it is.

Thank you. I am showing we have no further questions at this time. I will now turn the call back to Mr. Laney for his closing remarks.

All right, thank you, Mariama. I'll just thank everyone for joining. Hope everyone continues to stay safe, and we appreciate your support. 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 two hours and will run through February 4, 2021, by dialing 855-859-2056 or 404-537-3406 and referencing the conference ID of 4472264. 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.