Earnings Call Transcript - NBHC Q1 2021

Operator, Operator

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2021 First Quarter Earnings Call. My name is Mariama, and I will be your conference operator for today. 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, noninterest income, margins, allowance, 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.

Tim Laney, CEO

Thank you, Mariama. Good morning and thank you for joining National Bank Holdings First Quarter 2021 Earnings Call. I'm joined by our Chief Financial Officer, Aldis Birkans. I'm pleased to report quarterly earnings of $0.86 per diluted share and a return of 15.2% on tangible equity. This is particularly noteworthy given our substantial capital position. Credit quality is exceptionally strong with charge-offs at a record low of only one basis point annualized of total loans. Our Pay Check Protection program has been well-managed and has not represented a distraction as we turned our attention to new market share growth. In fact, I am very pleased with what I'm seeing in the pipeline for the second quarter regarding new business development. All this is going to speak to our strong liquidity position, so I'll simply point out that beyond benefiting from stimulus-related account balance increases, we remain very focused on growing new client relationships. And on that note, Aldis, I'll turn the meeting over to you.

Aldis Birkans, CFO

Thanks, Tim, and good morning, everyone. In my remarks, I will present the results for this quarter's financial performance as well as give an update on our guidance for the rest of 2021. For the first quarter, NBH turned net income of $26.8 million or $0.86 of earnings per diluted share, and our return on average tangible assets remained strong at 1.65%. Our strategically built diverse revenue stream, expense control, and excellent credit trends this quarter resulted in solid shareholder returns with a return on average tangible equity of 15.2%. As we have discussed throughout the pandemic, we had taken a very careful approach with regard to credit management and new loan originations. And what we started this quarter with a similar posture, the speed of the COVID vaccination rollout combined with the economic recovery on our footprint have allowed us to begin rebuilding our commercial and small business pipelines. For the first quarter, total loan fundings were $294 million, of which $173 million were non-PPP loans. Furthermore, we finished the quarter on a strong note with March representing the second highest non-PPP loan funding month in the past 12 months. The loans outstanding this quarter decreased $50.5 million. But as I previously mentioned, we are gaining momentum, and we expect to deliver solid organic loan growth in the second quarter.

Tim Laney, CEO

Thank you, Aldis. Look, I believe we're well positioned to deliver excellent results here in 2021. We have strong teams in great markets. We've built a fortress balance sheet, and we're well prepared to support both organic and acquisition-related growth. We continue to focus on delivering attractive total shareholder returns while maintaining the safety and soundness of our company. And Mariama, on that note, I'd like to open up the call for questions.

Operator, Operator

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

Levi Posen, Analyst

Hi. Good morning, Tim and good morning, Aldis.

Aldis Birkans, CFO

Good morning.

Levi Posen, Analyst

I hear the loan growth outlook going forward is optimistic. But in trying to place attribution on this quarter's one-off, what of that is market demand versus caution on the lending side?

Tim Laney, CEO

We believe there is a market for our services, and we recognize that we are operating in markets that have largely reopened. Initially, we were being very cautious at the start of the year, but we decided to change that approach. Our teams are now actively engaging in the markets again, and if you look at the first quarter, we experienced a significant increase in March. I'm particularly enthusiastic about our pipeline of new business for the second quarter.

Levi Posen, Analyst

Understood. Thank you. As you evaluate your presence, do you think we are nearing the end of branch closures, and could this change if mergers and acquisitions come into play?

Tim Laney, CEO

Look, it certainly will always be a consideration in the M&A, where we're talking about what we naturally focus on, which is acquisitions in our existing footprint. What I would tell you is, as we go forward on banking center consolidation, we've really moved out of the closure business now. We think about it as either consolidating into other reasonably convenient locations. And frankly, the biggest driver is watching the continued transition to digital. And as we expand our digital capabilities working through acquisitions or partnerships in the digital arena, I think we've got to keep an open mind to how we serve our client base in that regard. A lot of it is going to be driven by how they want to bank as we go forward.

Levi Posen, Analyst

Okay. And just one more for me. With some of the fee income guide going up here and the loan growth outlook being attractive going forward, what are your most recent thoughts on the buyback?

Tim Laney, CEO

It's all about target pricing where we think we can create solid value for all of us who are shareholders. Should the markets lose confidence in financials and should we see our price hit that point, we're going to be a buyer.

Aldis Birkans, CFO

As a reminder, we do have a $75 million Board authorized repurchase program in place. So, we are standing by should the opportunity present itself.

Levi Posen, Analyst

Great. Thank you. I'll step back now.

Aldis Birkans, CFO

Great questions, thank you.

Operator, Operator

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

Andrew Liesch, Analyst

Good morning, guys.

Aldis Birkans, CFO

Hi. Good morning.

Andrew Liesch, Analyst

Hi. Nice to hear the optimism surrounding the loan growth. I'll get to that in a second. So, just clarification on the fee income guidance of $40 million to $42 million, if I look at this quarter and take out the mortgage and non-recurring gain, that's about $9.4 million. So run rate, a little below your guidance range. Beyond bank currencies, where else do you have optimism that you will see fee income increase?

Aldis Birkans, CFO

Yeah. No, our treasury management service charge is clearly a big focus for us. As Tim mentioned, business banking for small businesses is acquiring relationships and building on that. So that's a big driver behind there. Fees are about 33% to 35% lower than last year. That's the one that's harder to put your finger on how that will evolve. But really, the treasury management business is what's driving the other service charges.

Andrew Liesch, Analyst

Got it.

Tim Laney, CEO

And I will say that, Andrew, the reality is we're always going to slightly underpromise and overdeliver in all of the categories. So, I think it's comfortable that it even works back to some of the other categories that we have a long history of overperforming.

Andrew Liesch, Analyst

Got it. That's helpful. So, moving back to loan growth seems pretty optimistic there. You guided for liquidity to remain elevated or cash level to remain elevated as you hold on to that until loan growth comes back on the balance sheet. So then, how should we roll that together and think about the margin, maybe more PPP fees get recognized this quarter? And do you think it's reached a low point at the 3.2%?

Aldis Birkans, CFO

Yeah. It's hard to put a finger on the percentage calculation given the excess liquidity. The way we look at it really is taking net interest income and looking at the components, what's driving that. The component I would back out is the PPP. We identified there's $6.2 million of unamortized PPP fees that will come through our margin depending on the forgiveness speed. But if you back out the $2.6 million, it'd be close to $44 million net interest income. We look for loan growth returning, that will grow from here on out.

Andrew Liesch, Analyst

Got it.

Tim Laney, CEO

It's so basic to what we do. But sitting on this low-cost liquidity with growing optimism of being able to deploy a lot of that liquidity into loans for our clients, small and midsized businesses, supported by the large capital base we have. We're very excited about that math. If you look at our stats on PPP 1, Phase 1, we're just at 98% of those loans having been submitted to the SBA for forgiveness with about 94% of those loans already paid. Our mindset with these programs going in was the faster we could help our clients receive forgiveness, the better the yield on those programs would be. But equally important, it was about moving that administration off of our team so that we could return our focus to new business development, taking care of existing clients, of course, but taking market share because we're frankly excited about some of the disruption that occurred over the last year and the opportunity for our teams to take advantage of it. So I would say the fundamental answer to your question is, this is about taking that low-cost liquidity coupled with our capital position and redeploying it into new relationship opportunities through lending money.

Andrew Liesch, Analyst

Got it. You guys have highlighted market share gains as being the main driver of loan growth going forward. Is that still the case? Or are there borrowing opportunities from your existing client base now?

Tim Laney, CEO

Well, all of us can share the details with you, but it's an important question because I think this is probably pretty true industrywide. If you look at where we're at on line draws and the use of lines of credit revolvers, we're running historical lows. Now again, we're looking at these clients sitting there for a number of reasons with a lot of excess cash on their balance sheets, so you would expect that. But the upside, not just for us, but I think for the industry, is that there's going to be, over time, a nice return to historical averages there. And so that's all upside.

Aldis Birkans, CFO

Right, Andrew, to Tim's point, our line utilization sits at an all-time historical low, 54%. Our typical line draw is between 61% and 62%. So there is about $60 million to $70 million of upside in loan outstanding if and when those lines get drawn back up.

Tim Laney, CEO

Just in that one small category.

Andrew Liesch, Analyst

That's great. Thank you for the color. I'll step back. Thanks.

Tim Laney, CEO

Thanks for the questions, Andrew.

Operator, Operator

Your next question comes from Andrew Terrell with Stephens. Your line is open.

Andrew Terrell, Analyst

Hey, good morning.

Tim Laney, CEO

Good morning.

Andrew Terrell, Analyst

Tim, maybe kind of in the same vein of market share takeaway. I was hoping you could share just any success you've had this year in kind of the new hire front? And then maybe just discuss what areas you're focused on hiring in and just how the overall hiring pipeline is shaping up for 2021?

Tim Laney, CEO

Yes. The message I would send to any interested teams and bankers is if you're looking for a home, come and talk to us. If you're in the footprints and you've got a track record of performance and want to be well rewarded, we're interested in talking to you. And frankly, if it's a team versus an individual that's even better. I do think the reality that we have to grapple with as an industry is that there's going to be a growing war for talent, so to speak. Attracting and retaining strong bankers with proven track records in the small and midsized commercial markets, in particular, is going to be a challenge. We're spending more and more of our time developing our own bankers. We think that's important for the culture and in terms of creating runway for young bankers and giving them opportunity for growth. But we're certainly more than happy, for example, to talk to teams, talk to bankers, particularly coming out of some of the larger financial institutions as they tend to migrate up in size of company they bank and abandon the lower mid- and smaller-sized companies. That's a market we are firmly focused on covering.

Andrew Terrell, Analyst

As you gradually re-enter the market this year, what have you observed regarding competition from your peers? Specifically, how is pricing influencing origination yields, and have you noticed any adjustments in structure?

Tim Laney, CEO

Yes. I think an advantage we had coming into 2021, we've operated with a very low level of exposure to commercial real estate as a percentage of risk-based capital. Early on in this year, you've seen a lot of banks for various reasons backing off from that space. While we're certainly not going to lean into areas like retail or office right now, we have been seeing some interesting opportunities to pick up reasonable returns with very strong guarantors or sponsors in the commercial real estate space. A lot of strong equity, and that's been an area we've been willing to increase our exposure to and feel good about that. We're just seeing traction across a broad set of industries, all of our markets always believe they can be doing better than they are. We're fortunate to be operating in very, very good markets that are, for the most part, meaningfully open at this point.

Andrew Terrell, Analyst

Okay. Great. I appreciate you guys taking my question.

Tim Laney, CEO

Thank you.

Operator, Operator

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.

Tim Laney, CEO

Well, thank you, Mariama. I want to thank those that asked questions. Again, I think it was a very straightforward first quarter. Again, you've noted the optimism we have about not only the second quarter, but the ramp-up we see as we move through 2021. So we'll be focused on delivering against that and look forward to talking to you next quarter. Thank you.

Operator, Operator