National Bank Holdings Corp Q3 FY2021 Earnings Call

Good morning, everyone, and welcome to the National Bank Holdings Corporation Twenty Twenty One Third Quarter Earnings Call. My name is Nick, and I will be your conference operator for today. At this time, all participants' lines 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 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. 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. In addition, the call today will reference certain non-GAAP measures, which National Bank Holdings Corporation believes provides useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations section of the company's website. It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman, President, and CEO, Mr. Tim Laney.

Thank you, Nick. Good morning, and thanks for joining National Bank Holdings' Third Quarter Twenty Twenty One Earnings Call. I'm joined by our Chief Financial Officer, Aldis Birkans. Our focus on growing share in attractive markets is translating into strong top and bottom line results. I believe the quality of our new business pipeline will translate into attractive results through the fourth quarter and into twenty twenty-two. I'm very proud of our bankers' engagement with our small and medium-sized business clients and prospects, and I view this work as a differentiating driver of the momentum we're building in our business. We continue to be prudent in our underwriting of credit risk, and we feel very good about the health of our loan portfolio. On that point, I'll turn the call over to Aldis to cover the quarter in more detail. Aldis?

All right. Thank you, Tim, and good morning, everyone. Thank you for joining our earnings call this quarter. We are pleased to report third quarter earnings of nineteen point eight million dollars or zero point sixty-four dollars per diluted share. This quarter was highlighted by record loan originations, an exceptionally clean credit book, and capital deployment through an investment in Finstro Global Holdings as well as stock repurchases. During the quarter, we also aimed to improve the company's balance sheet through the sale of the majority of our mortgage servicing rights. I will cover these items in more detail later, but first, let's address loan growth. Third quarter loan fundings were a record four hundred thirteen point three million dollars; as a result, we grew our core loan book during the quarter by a solid sixteen point five percent annualized. The loan growth was broad-based, with all asset classes and geographies contributing to the loan balance growth. Furthermore, we continue to be very pleased with our bankers' business development efforts, which are generating a strong pipeline across all of our markets. At this time, we project to exceed our original guidance for loan growth from the prior quarter and expect near double-digit annualized growth for the fourth quarter of twenty twenty-one. With regards to the Paycheck Protection Program loans, we had seventy-six point eight million dollars outstanding as of September 30th of twenty twenty-one. The remaining PPP loan deferred revenue balance is two point four million dollars, and we expect most of this fee to be recognized in the fourth quarter as forgiveness efforts continue. Turning to deposits. This quarter, we continued the strong growth in deposits, with average transaction deposits increasing five point two percent annualized. Our cost of total deposits decreased another three basis points this quarter to a low twenty-one basis points. Strong deposit growth benefited our average earning asset base, which similarly grew sixty-two point five million dollars. As we discussed during the last earnings call, we have started deploying cash into higher-yielding loan balances. The resulting taxable equivalent net interest margin during the third quarter expanded eleven basis points to two point nine three percent, and the excess liquidity still had a thirty-six basis point dilutive impact on our margin. This quarter's fully taxable equivalent net interest income was forty-eight point nine million dollars and included two point six million dollars of PPP loan fees. Stripping out the PPP loan fees, our linked quarter core net interest income grew nineteen point eight percent annualized. Our asset quality remained strong with another quarter of solid reductions in non-performing loans and non-performing assets. NPAs decreased nine point six percent this quarter and were twenty-seven percent lower than one year ago. Net charge-offs for the quarter were just two basis points annualized. These excellent credit trends, combined with improving economic forecast projections from Moody's, resulted in a reduced calculated reserve, which was sufficient to support the new loan growth, and therefore required no provision expense this quarter. The resulting ACL to total loans, excluding PPP, was one point one three percent at quarter end. Total third quarter non-interest income was twenty-eight point five million dollars. Our client engagement for both consumer spending and business account activity continued to expand, with total service charges reflecting five point five percent growth this quarter over the third quarter of last year, and bank card fee revenue increased twelve point two percent over last year's third quarter. We also continue to execute on our banking center efficiency initiatives, which resulted in the sale of an additional banking center during the quarter. As a result, other non-interest income benefited from an eight hundred thousand dollar deposit premium gained this quarter. Additionally, this quarter, we sold approximately one point three billion dollars of our mortgage servicing portfolio. With the high mortgage production volumes, this portfolio had more than tripled since the beginning of the pandemic, and this was a strategic move to reduce mortgage servicing. As a result of this sale, we reduced our intangible assets by approximately eleven million dollars and realized a one point three million dollar gain. The other key driver this quarter for mortgage revenue is the margin recovery as compared to the second quarter of twenty twenty-one. For the remainder of the year, we project our total non-interest income to be in the range of nineteen million dollars to twenty-one million dollars. As always, large swings in long-term interest rates could impact both mortgage production and this projection. Turning to expenses, this quarter's non-interest expense totaled fifty-one point three million dollars and was elevated due to a couple of nonrecurring items. During the quarter, we incurred two point four million dollars in transaction-related expenses for the Finstro investment, as well as an eight hundred thousand dollar write-down on one OREO property related to a prior bank acquisition. For the fourth quarter, we expect non-interest expense to return to the range of forty-five million dollars to forty-six point five million dollars, consistent with our core run rate. With regards to capital, this quarter we invested twenty million dollars in Finstro Global Holdings as part of our previously announced strategic partnership. This investment resulted in NBH owning a thirty-three percent non-controlling interest in the company. Additionally, during the quarter, we purchased nineteen point four million dollars of our stock. As a result of the stock buyback activity, the fully diluted share count for the fourth quarter is projected to decrease to thirty point eight million shares. Our capital ratios continued to remain strong at ten point four three percent Tier 1 leverage ratio and fourteen point five seven percent common equity Tier 1 ratio. And finally, despite the stock buyback activity, our tangible book value per share increased zero point one nine dollars this quarter to twenty-four point two zero dollars.

Thank you, Aldis. I want to thank all of our teammates for their contribution to our strong third quarter. On our last earnings call, I said I believe we were poised to deliver record levels of new relationship growth and loan production, and our team delivered. As we look ahead, we feel very good about the high level of business activity in our markets and our company's potential for future growth. Now speaking of future growth, we believe we're on the verge of creating a comprehensive digital financial ecosystem capable of providing small and medium-sized businesses with unparalleled access to a full range of banking services and blockchain payment alternatives. We're building a digital marketplace of financial services within the bank regulatory framework that we believe can be a game changer for small and medium-sized businesses across the country. You can be certain that we'll be sharing more along the way. On that point, Nick, let's open up the line for questions.

Thank you. And our first question comes from Brett Rabatin with Hovde Group. Please go ahead.

Hey, good morning, everyone.

Hey, good morning.

Good morning.

I want to first ask Tim on your last point about the ecosystem in the Fintech space. Can you maybe give us, if possible, any thoughts on revenue and how you see that playing out either in the near term or over a multiyear period? Is it more creating an ecosystem to add new clients, or do you expect this to be more of a banking-as-a-service kind of platform that is driving specific fee revenues in particular?

Yes. I'll begin with the last question you touched on. To be clear, we are not looking at playing in the banking-as-a-service arena. I mean, there could be one-off elements where we're doing that on an experimental basis, but ultimately our view is that the banking-as-a-service play will be commoditized. On the other hand, we are very focused on the development of comprehensive relationships with small and medium-sized business operators. To be even more clear, we believe across this country, there is an opportunity to engage with minority groups and a broad range of small business owners in particular in a way that will give them access to the bank-regulated system that they've not experienced to date. So, as we talk about this ecosystem, we think about it not necessarily on a proprietary basis. We think about it again more as a marketplace where we will be working with best-in-class partners to deliver a full range of banking services through this ecosystem. The first leg is obviously digital lending capabilities; we tend to think about those lending capabilities in three arenas: addressing trade finance or working capital needs, and that's a key role that Finstro will play, and again, we’re fortunate to have been able to partner with Finstro, who has a proven track record in Australia and brought their company to the United States. I suspect we'll be working to deliver SBA-related products to address commercial real estate ownership, where small and medium-sized business owners want to own and invest in their factories and business places, and then we'll be talking about the addition of digital equipment finance and other capabilities that check the boxes around the primary needs of small and medium-sized business owners. The second leg relates to depository and treasury management services; we think a real differentiator between non-bank players and doing this within the regulatory framework is obviously the ability to deliver these services on an FDIC insured basis, which we think is huge. The third leg is about delivering comprehensive information dashboards when we think about real problems to be solved for many business owners who don't have the benefit of having a CFO or a finance office. That ability to understand where they are on a cash flow basis on a day-to-day basis can help reduce anxiety in these business operators' lives. The fourth leg is about leveraging blockchain to reduce cost of payments while improving the quality of information related to those payments. I'm not going to go much deeper than that, but put all four legs together and think about where this can take us on a literally coast-to-coast basis. I think it's premature to be talking about incremental earnings for the first quarter of twenty twenty-two. Having said that, I believe there will be elements of this ecosystem that will begin to deliver incremental profitability next year.

That's very helpful, Tim. There was a lot of detail, and it was a really interesting dynamic that you've got. I guess the other big question I wanted to ask was just around the loan growth dynamic versus the margin. I was just curious; it would seem like if you can continue this growth and deploy liquidity, the margin should keep going up. So, honestly, I was curious if it would seem to you like the margin can continue to have an upward trend, and then I just wanted to ask on the loan growth side, is this a lot of new clients driving this growth? Or is this more existing clients drawing lines of credit?

Yes. Brett, I'll take the margin first. You're absolutely right; as we deploy the cash into loans, that will be accretive to the margin. One item that is benefiting all banks these days outstanding, which is the PPP loan fees. So if you take that out, on a linked quarter basis, we grew two point two million dollars, almost twenty percent annualized in terms of net interest income, and that is driving the margin expansion. But again, the PPP loan fees are a short-term benefit, which we obviously take but are not counting on, so you need to adjust for that in that calculation, but the core margin is absolutely expanding.

On the loan growth prospects, look, I could not be more proud of our teams and their engagement with existing clients and prospects. I tend to follow in that camp of people who believe that you may be able to maintain relationships over the telephone and Zoom and other capabilities, but it's difficult to develop new relationships without being face-to-face. We've been back in our offices since July of last year; of course, our front-line banking center teammates never left their offices. But I think the fact that we have our business banking and commercial banking officers out in the marketplace engaging with business operators has been a real game changer for us. Again, I'll remind you that we were seeing new perspective business in the pipeline as we moved through the first half of this year. We really watched the business and the balance sheets of those businesses through the first quarters, as they began to deliver their annual balance sheets and income statements, to ensure that we liked what we were seeing and that the businesses resumed operations accordingly. We've had great success in winning new relationships, and as I suggested in my earlier comments, we feel very good about the pipeline as we look to the fourth quarter and into twenty-two.

Okay. That's very helpful. Thanks for all the color. Congrats on the results.

Thank you.

Thank you. And our next question comes from Andrew Liesch with Piper Sandler. Please go ahead.

Hello.

Andrew, your line is not live, perhaps muted on your end.

Well, sorry about that. I apologize. I don't know what happened. Thank you for the detail on the fintech partnerships, very helpful. Just a couple of questions here. One question here on the guidance on the non-interest income; the mortgage banking premium increased, but if you expect the total non-interest income line to drop this quarter, that's just from more volume here in the slower months?

That's right. Within that is a certainly seasonal slowdown expected this quarter to take place in the fourth quarter as it typically does in winter months. So that's embedded in that mortgage guidance. Also, just to repeat, this quarter benefited from the eight hundred thousand dollar benefit from the deposit premium on the sale of the banking center. So that obviously is not a recurring element either, so if you're looking at the linked quarter basis, that's the guidance.

Right. Got it. Then on the loan yields, I was curious about new production where those were being added relative to the car portfolio yield, excluding the PPP loan?

Right. So if you look at the table and look at the first line, which is originated loan FTE four point zero one percent that includes the benefit of the PPP; if you exclude that, our originated loans are yielding about three point eighty-seven percent this last quarter, which is fairly flat to the prior quarter, and our new loan originations came on at three point nine percent. So that's at or slightly accretive to the originated book as it exists.

Got it. With a lot of the growth being these variable rate loans.

It's a lot of variable rate loans. I'd say it's about fifty-fifty type of mix between variable and fixed rate.

Gotcha. Excuse me, one more question related to the mortgage business and expenses. If you parse out how much of the salaries and benefits line was related to the uptick in mortgage banking revenue in the third quarter?

Yes. Well, I'm not going to give you an exact answer, but I'll give you the guideposts that I typically talk to. If you take the quarter back out the one point three million dollar NSR sale benefit, and then about thirty percent to thirty-five percent of the remaining gain on sale is usually our commission and variable type of costs associated with mortgage.

Andrew, I would add to that last question. I think it's an important one; I give our residential banking team leadership and all this and his team a lot of credit for being very focused on bringing those variable expenses down as we see revenue coming down in the mortgage banking business. It's one thing to understand how commissions should naturally come down as closings go down. The real art is bringing those other variable expenses down, and they've just done a remarkable job of managing those expenses accordingly, and you should expect that to continue.

Okay. Got it. Very helpful. Thank you for taking the questions. I'll step back here.

Okay.

Thank you. And our next question comes from Kelly Motta with KBW. Please go ahead.

Hi. Thanks for the question. And thanks, Tim, for adding the color on the fintechs. There is a lot more in there than I thought there would. I'm definitely going to have to go back to the transcript for us if I could read. But I wanted to ask a bit about deposits. You rolled off the time deposits, and kind of that increased balance sheet leverage has helped support some expansion. Just wondering how we should be thinking about the trajectory of deposits and if there's more kind of higher-cost types of accounts that are left to be rolled off, or should we expect growth here in maybe next quarter? Any thoughts on that would be helpful.

Yes. We continue to be laser-focused on adding relationships and operating accounts. So that's the primary driver for us as we manage internally, strategically, our deposit growth. Naturally, some of that will be from higher-priced time deposits that might be in one-off situations that are rolling off; we just are not chasing that rate, resulting in some of the time deposit book decreasing. For us, it's really about building and expanding the relationship base behind it. In terms of your question about the cost of funds and the cost of deposits at the end of the quarter, the total deposit cost was twenty-one basis points. I believe we can get below twenty by the end of the year as the costs continue to decrease.

Thank you. And then if I could, on capital, you're buying that stock this quarter. Just wondering on thoughts for continued opportunistic buybacks, and we got color on capital on some of the fintech investments that you had alluded to in past quarters. Just wondering any updated thoughts on capital deployment, given you still have quite a bit of flexibility where you are right now? Thanks.

Kelly, I think you hit on the right mindset there, which is we are first and foremost going to be opportunistic, and we do think the flexibility we have enables us to continue to look at our options. When we think about the investments in both Finstro Global Holdings and Figure Technologies, it was really about our belief that these two partners represented key pieces to this puzzle we're putting together to create the ecosystem. You can expect on other partners that represent other key pieces of this puzzle to become a part of this where opportunities to invest will do so. We believe in the upside of what we're doing here, and you will probably see us less focused on investment in the smaller community bank and more focused on what we believe is the future. Having said that, we'll maintain optionality, and should we come across the right opportunity in the coming months in the traditional bank space, we will do that. But we are in ongoing discussions with a lot of very smart people and partners who we think could be key in taking to unify from coast-to-coast and creating again, unparalleled access for small and medium-sized businesses. So again, I think you hit the nail on the head; we'll be opportunistic and we'll maintain optionality.

Great. Thank you so much, Tim. Very helpful.

Thank you. And our next question comes from Andrew Terrell with Stephens. Please go ahead.

Hey, good morning.

Hey, good morning.

Good morning.

Maybe back on the margin really quickly. It was good to see you leverage some of the liquidity this quarter. I guess with the cash positions around seven million dollars to eight hundred million dollars, I know the growth outlook feels like it's improved, but is it fair to think that you would still build the securities portfolio from here, or any kind of update to the strategy?

Yes, in the investment securities portfolio we added around maybe one hundred million dollars on a linked quarter basis. I think that's where I'd like it to be unless some outlook for loan growth or something else changes. For now, we'd like to preserve the optionality on the balance sheet as well and not lock into a long-duration or high-risk asset and just keep the cash deployed in the loans.

Yes. Understood. It looks like with the zero provision taken this quarter, as well as just the strong balance sheet growth, you're back fairly close to day one seasonal levels. I guess moving forward, should we expect the provision line to more closely match charge-offs and a reserve for new loan growth, or do you think there's room for the allowance ratio to move further down from you?

As of today, we are fully reserved as the current conditions so indicate. It’s hard to predict where you will depend on where the outlook goes and where the credit trends are. Certainly, we always will have to cover the new loan growth as well as if there is any deterioration in the credit book. But right now, I’m just not sure to predict where this may go from here because the Moody's projections are driving this quite a bit. If you look at some of those forecasts today, some of them indicate getting back to near three percent unemployment rate in the not-too-distant future, and any little step back from there can drive the model change.

Okay. That's good color. I appreciate all this. All right. Thanks for taking my questions. And Tim, appreciate the color on the ecosystem and the partnerships.

You bet. Have a good day.

Thank you. And our next question comes from Jeff Rulis with D.A. Davidson. Please go ahead.

Thanks. Good morning, Tim and Aldis.

Hi Jeff.

Hi, Jeff.

Yeah. Just to follow up on a few of those topics. The first being on the fintech relationships. Not to simplify, but if we're looking for ROI on that investment, that's maybe the wrong way to look at it in the near term. It's kind of the staying relevant or being a leader in the business kind of cost of doing business, and maybe those revenue synergies occur down the road as we get into that partnership or investment. Is that what you had kind of largely expected in the short run?

I think that's a reasonable summary. I think of companies like Amazon when they started, and they didn't have the benefit of having a core engine like we have to continue to drive revenue and profitability, and we certainly believe our core bank has a tremendous amount of upside and runway. On the other hand, I get just as excited about the prospects for to unify, as I did when we launched NBA some eleven years ago, and when we were hearing it couldn't be done. I think the way we think about the technology is that we will strive with great discipline to avoid being drawn to the bright, shiny objects and investing in technology just for the sake of playing in that space. This is really about looking at problems that exist for small and medium-sized business operators in this country today and believing we can use the tools, many of which happen to be technology, to create a business that can solve those problems coast-to-coast. What's really interesting about this, as we think versus thinking about this business model and waiting for it to come together over a five-year period or something like that, is that the architecture is such that we believe there can be incremental contribution earnings beginning as early as next year. And that doesn't mean that the entire business model will be up and running, but there will be incremental elements of the model that will already be taking to market and benefiting from.

No, I did not specifically mention where I think core margin is headed, but to come back to driving impacts to the margin today, there are two alluded items: the PPP loan fees providing two point six million dollars this quarter, as well as the excess cash and earning asset base diluting the earning asset yield. If you back those out, the core margin is currently around three fifteen percent to three twenty type of percent margin, and we will look to build on that.

Got it. Thanks. And then back to the loan growth and expectations sort of uptick in obviously in the third quarter, and then as you're guiding for fourth quarter. I wanted to kind of ask that a different way: do you think that's a little bit of a catch-up to where you had a strong second half, but then we enter twenty-two and you're back to sort of more normalized, or is that catch-up in the second half? Or is it a real emergence of growth that could carry into the new year? Sorry for the long-winded question.

No, no, it's an important question, and I would just ask you to get back and read the transcripts at the year end, at the end of the first quarter, and at the end of the second quarter. We did talk about the fact that we had our feet on the brakes certainly coming into twenty-one, waiting until the end of the first quarter until we received the financial information from these prospects and clients. We started to lean in in the second quarter. We've seen the benefit from a hyper-focus on market development and business development in each of our respective markets, and I believe that hyper-focus and engagement will carry us strongly into twenty twenty-two. We are very energized around what we're seeing in our markets, and we're fortunate to be operating in some of the better markets in the United States. But make no mistake, I couldn't appreciate our bankers more for their level of engagement, and it's making a difference.

Thanks. I have one more, I'm sorry. The mortgage line. Just a quick one, just for twenty-two, is it safe to assume sort of NBA forecast for twenty-two versus twenty-one; would you expect to largely meet that?

I think the answer is yes, that's our starting point. But you have to come back and look at the again back to Tim's comment: we are operating in markets that are growing faster, and certainly Colorado, Utah, and other excess markets have greater population inflow than some other parts of the country. So we are benefiting from that, and secondly, our volumes these days are back to about sixty, called sixty-five percent purchase market, which is our driving core behind that mortgage business as well. So the NBA outlook is important to incorporate as well.

Okay. Thank you, Aldis.

Thank you.

Thank you. And I'm 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, Nick. I want to thank everyone who attended this morning for your time and attention, particularly those who are investors in National Bank Holdings. We continue to be focused on creating strong total shareholder returns, and our commitment is to do everything that's prudent to continue a track record of delivering solid results. Thanks and have a 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 four hours. It will run through October twenty-five, twenty twenty-one, by dialing eight eighty-eight two zero three one eleven two and referencing passcode seven five seven seventy-seven seventy-four. The earnings release and 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.