Earnings Call Transcript - NBHC Q2 2021

Operator, Operator

Good morning, everyone. Welcome to the National Bank Holdings Corporation 2021 Second Quarter Earnings Call. My name is Alan; I'll 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, noninterest income, margins, allowance, taxes and noninterest expense. Actual results could differ materially from those discussed today.

Tim Laney, CEO

Thank you, Alan. Good morning, and thanks for joining National Bank Holdings' Second Quarter 2021 Earnings Call. I'm joined by our Chief Financial Officer, Aldis Birkans. With a renewed focus on growing market share, we realized annualized loan growth of 8.4% during the quarter. Equally important, we entered the third quarter with a very strong pipeline of new relationships. We're realizing new relationship growth across our personal, business and commercial banking segments. Credit quality continues to be near pristine, and we operate in markets that have largely recovered from the pandemic. As a result, I believe we are very well positioned for strong growth during the second half of the year. And on that note, Aldis, I'll hand it off to you.

Aldis Birkans, CFO

All right. Thank you, Tim, and good morning, everyone. Thank you for joining our earnings call this quarter. For the second quarter 2021, we reported net earnings of $24.2 million or $0.77 per diluted share. Our return on average tangible assets was 1.41% and our return on average tangible equity was 13.41%. Also earlier in the quarter, we announced a second dividend increase for this calendar year, and our quarterly dividend now stands at $0.22 per share. As we discussed during last quarter's earnings call, we are excited about our loan pipelines, and our loan production this quarter did not disappoint. The second quarter's loan fundings were $362.1 million, which was our second highest non-PPP loan production quarter in history. As a result, we grew our core loan book during the quarter a solid 8.4%. We continue to be very pleased with the business development efforts of our bankers and our loan pipelines are building nicely across all of our markets.

Tim Laney, CEO

Thank you, Aldis. We are pleased with the developments in our markets and our bankers are well positioned to gain market share. I believe we have the opportunity to achieve record levels of new relationship growth in loan production in the second half of this year. With that, I'll thank you and ask Alan to open up the line for questions.

Operator, Operator

We'll take our first question from Brett Rabatin with Hovde Group.

Brett Rabatin, Analyst

Wanted to first ask, if I heard correctly, the guidance for the mortgage for the back half of the year is $20 million to $25 million. And if I was writing down my notes correctly, it sounded like you were feeling a little better about the gain on sale margin in 3Q maybe versus 2Q. Can you just maybe go back over that and just talk maybe about what you're seeing in the pipeline? And if I got this correct, it sounds like you're expecting mortgage to increase a little more from 2Q levels despite maybe a little better gain on sale margin.

Aldis Birkans, CFO

Yes, I think you heard it right. So $20 million to $25 million, certainly have to take into account the Q4 seasonality there that typically takes place, although last year fourth quarter and first quarter of this year were unusually profitable quarters for the industry. But in terms of the volumes, the big impact that we saw was the financing activity that certainly was down on a linked quarter basis, almost 50% driven by the higher rate environment. And that one, we're not necessarily seeing the recovery just yet. So while the margins are recovering, the volumes are somewhat steady going on from the second quarter into third quarter.

Tim Laney, CEO

Aldis, you may want to speak alternatively to what we've seen in new home financing.

Aldis Birkans, CFO

Yes. No, certainly, Tim. And so the good news for us is, and we've always focused in what we’d like the mortgage business for us has been the attention that our bankers spend on the purchase market. And that market, we grew linked quarter, we grew 41% volume on purchases and 46% over the same quarter last year. So we certainly see what the activity our markets are providing and opportunities that the markets are providing for our market bankers.

Tim Laney, CEO

I think the most encouraging point is that the markets we participate in remain very attractive and continue to grow. The real challenge, as we've discussed before, is simply finding available housing. The demand stays strong.

Brett Rabatin, Analyst

Yes, it's definitely the case in many markets across the country. The other thing I wanted just to ask was you guys were a bit unique this quarter with the strong C&I loan growth. And just wanted to maybe dive a little deeper into that and see if that's increased loan utilization, new client adds, existing clients doing more things, kind of what's driving that loan growth?

Tim Laney, CEO

Great question. The positive aspect is that we are experiencing growth in market share. In the spirit of the Olympic season, I would say that our teams, whether in badminton or weightlifting, are achieving success. I feel we are nearing optimal performance in that area. Therefore, I fully anticipate strong results from our small business or business banking group for the rest of the year.

Operator, Operator

Okay. And the next question we'll take will come from Andrew Liesch with Piper Sandler.

Andrew Liesch, Analyst

Sticking with the loan growth theme, Tim, you mentioned that you expect record production in the second half of the year based on recent performance, which seems reasonable to me. However, the growth estimate for non-PPP loans is mid- to high single digits. What could prevent that from reaching the higher end? Do you think it's possible to exceed that growth guidance?

Tim Laney, CEO

I believe we have a history of being fairly conservative in our forecasts. We've all seen how unpredictable things can be. However, based on our current position and the markets we're involved in, I think there is a strong expectation that we will perform towards the higher end of that guidance. Of course, we will always aim to exceed that. Please go ahead, Aldis.

Aldis Birkans, CFO

Yes. And one just piece of color in terms of what is unknown in the last several quarters we've seen quite elevated paydowns, payoffs, so that's part of the maybe hedge in the guidance.

Tim Laney, CEO

And to be clear there, when we talk about paydowns, payoffs, it's not losing relationships largely. It's really about an amazing amount of liquidity that resides on our clients' balance sheet. So that's why we've been, frankly, so hyper focused on new market share gain. That's where we're going to see the growth. It's literally all about taking care of existing clients and knowing that their borrowing needs will come back to a greater level but just as important, being hyper focused on growing market share, and we feel good about where we stand on that front.

Andrew Liesch, Analyst

Got it. That's helpful. Looking at the current reserve ratio, which is model-driven, what do you consider to be the appropriate level for your operations? I understand there's a benefit from the purchase accounting discount, but where do you believe your reserve ratio should be?

Aldis Birkans, CFO

I’m not sure what the most appropriate level is, as it will be influenced by the macroeconomic environment. However, I believe our initial allowance for the CECL model is a good reference point. When we started in 2020, our allowance for loan losses was approximately 1% of total loans. So, in my opinion, that serves as a starting reference. The direction from here will definitely depend on the overall economic outlook.

Tim Laney, CEO

If we look past the CECL model, while they are somewhat connected, I want to remind you and the other listeners that in addition to our loan review team stress testing, we engage a third party once a year to stress test our loan portfolio in great detail and assess how it would perform in the worst economic scenarios. The findings from that analysis continue to indicate that the granularity and diversity of our portfolio are highly advantageous. That said, we could argue for a figure lower than 1%. However, our inclination is to maintain that 1% and, to be honest, we will strive to protect it. Additionally, recognizing the objectivity of CECL, there will likely always be some tension there, as we aim to preserve as much reserve as possible. It's really that straightforward.

Operator, Operator

All right. So we will move on to Andrew Terrell with Stephens.

Andrew Terrell, Analyst

So maybe on the margin really quickly. I think several months ago, we talked about new kind of origination yields in kind of the 4% ballpark. Clearly, the production picture has stepped up since then. Just wanted to get a sense of where kind of blended new production yields were coming on the balance sheet today and then how that compares to what's maybe rolling off the balance sheet?

Tim Laney, CEO

Yes, great question.

Aldis Birkans, CFO

Yes, certainly. The new loan origination volume for the second quarter with $362 million in production was approximately 4%. When reviewing our NIM table and focusing on the first line item for originated loans, there is certainly a benefit from the PPP loan fee acceleration included. However, after excluding the PPP loan benefit, our core originated loan yields were 3.85% in the fourth quarter of last year, 3.87% in the first quarter of this year, and 3.88%. Therefore, these 4% new origination loan yields appear to be beneficial, as they are replacing lower-yielding loans that are maturing, thus positively contributing to and enhancing our originated loan portfolio with new originations.

Tim Laney, CEO

And keep in mind, that's virtually all of our variable loan book. I mean we're not taking tenured risk to get those rates, which I think is important.

Andrew Terrell, Analyst

Got it. Okay. And then just to make sure I've got the messaging right on kind of liquidity deployment. It sounds like just given where you think growth is shaping up over the next several quarters, the plan for the excess cash on the balance sheet is just to hold it and maybe deploy into the loan book over the next several quarters? Or should we expect material securities purchases from here?

Aldis Birkans, CFO

I don't think you'll see material securities purchases from here. Again, last quarter, we added some of the backup in the yield curve. You can see that. But again, it's all highly cash flowing and be able to stop that and benefit the cash flow or redirect the cash flow and the new loan originations, if needed. But nothing material that we're looking to add in the securities and now that loan growth is back on table, we do expect some of that cash being absorbed and 10 basis point earning assets being displaced with, as we just talked about with the 4% that's quite a powerful benefit to our net interest income growing in the coming quarters.

Tim Laney, CEO

Very powerful math.

Andrew Terrell, Analyst

Okay. And then just if I can sneak one more in. Apologies if I missed it, but were there any share repurchases made during the quarter? And then I know there's a $75 million authorization out there. Is it fair to say with the valuation coming in a little bit over the past quarter, you might be a little more opportunistic on the buyback?

Aldis Birkans, CFO

Yes. To answer the first part of your question, nothing was done in the second quarter, but

Operator, Operator

And your next question will come from the line of Kelly Motta with KBW.

Kelly Motta, Analyst

I wanted to circle back on loan growth and the market share gains. I was just wondering if there's any pattern to where you're getting those gains. If it's the front range or maybe your newer Utah-based expansion or if it's more broad-based than that? Just any color around that would be helpful.

Tim Laney, CEO

It really is broad-based. I mean we feel very good about the momentum we're seeing in all of our geographic markets and our specialty businesses, and felt good about the second quarter and feel very good about what we're seeing in the pipeline across the board. So I'll remind everyone, I mean, these are pretty incredible markets we operate in, whether you're talking about the front range of Colorado, Dallas, Austin, Salt Lake City, Kansas City, I mean, we clearly benefit from operating in markets that have recovered much faster than a lot of the rest of the country. And then our specialty businesses and teams there have really done a stellar job of stepping up and delivering new relationships to the bank. So I'm really pleased, Kelly, to report that it's diversified and across the board.

Kelly Motta, Analyst

Great. You certainly have a strong market. Now, regarding expenses, it seems that the guidance is leaning towards the lower end compared to last quarter. Is that due to mortgage impacts this quarter, or did we really see the advantages of the branch plan come through? I'm curious if there are any changes in your expenses, whether better or worse.

Aldis Birkans, CFO

Yes. The two main drivers will be the banking center and the efficiencies that are starting to take hold, which are positively impacting our run rate, along with some of the mortgage commissions. Specifically for the fourth quarter, we do anticipate a seasonal slowdown in that area, which will be advantageous. Those are the two main factors. Additionally, we are utilizing some of the savings we are achieving. If you consider the commission-related expenses from last year and compare it to this year's full year guidance, we expect about $8 million in lower core run rate for the full year compared to last year. This reflects the cost efficiencies we have implemented. We are also reinvesting some of those efficiencies into technology to ensure we maintain our momentum, which is included in the guidance. Therefore, the guidance of $89 million to $91 million encompasses all of this.

Tim Laney, CEO

Kelly, what's even more inspiring is that while we're realizing savings from consolidating our brick-and-mortar locations, our teams have done an incredible job of retaining clients at those locations. This relates to Aldis' point about investing in technology. The trend we’re observing in the industry of successfully converting more clients to a digital platform is very encouraging, and we will continue to evaluate our strategy regarding the balance between brick-and-mortar and digital. Additionally, I believe this is the right moment to inform our audience that investors and others can expect to see a stronger commitment to our digital offerings and ecosystems for small and medium-sized businesses. We have more updates coming on that front, and we're excited about the potential to provide alternatives to traditional banking systems for small and medium-sized businesses moving forward. It's important to note concerning your question about expenses related to brick-and-mortar sales that we are retaining revenue while achieving these changes.

Operator, Operator

Our next question will be from Levi Posen with D.A. Davidson Companies.

Levi Posen, Analyst

I think it was hinted to maybe a little bit earlier, but I was wondering what's the timing this quarter of the securities that you did add, when those maybe came on?

Aldis Birkans, CFO

Yes, they came on actually, this was pretty evenly purchased throughout the quarter with a slightly higher activity in April and May compared to June, for instance. Earlier in the quarter, when rates increased significantly, we did add some securities.

Levi Posen, Analyst

Okay. And so is it fair to say that movement in the yield curve, a positive movement of it as it works into your margin calculations would potentially increase your appetite to deploy into both loans and securities?

Aldis Birkans, CFO

Certainly would love to deploy all of it in the loans. The securities are currently at $1.3 billion, and our long-term target is to have about 15% of earning assets in securities. We are approximately $300 million above that target if you exclude today’s earning assets. Therefore, I don't anticipate a significant increase in that portfolio from this point onward.

Tim Laney, CEO

It's an important question. We'll continue to be opportunistic around traditional banking I will tell you that we've actually looked at a number of opportunities on an exclusive basis and frankly, have not felt like ultimately, they were the right fit for our company for 1 reason or another. Where we are hyper focused is on creating an alternative ecosystem for medium and small business. We think there are a lot of problems for small businesses that can be in medium-sized businesses that can be solved using some of the emerging technology, and that we see out there today. And we believe we understand small- and medium-sized businesses as well as any bank in the country regardless of their size. Just given our background and focus as a team, we are very focused on looking at bringing together and working to bring together some very interesting alternatives to traditional banking in that space. So more to come, but I will tell you in the spirit of full transparency that that's where we are spending a lot of our time and energy and hope to be coming back to you soon with more information on that front.

Operator, Operator

I'm showing we have no further questions at this time. So I'll now turn the call back to Mr. Laney for his closing remarks.

Tim Laney, CEO

All right. Thank you, Alan, and I want to first thank all of the individuals that asked questions today, for your thoughtful questions and time. Thank you all for joining our second quarter earnings call, and we look forward to reporting before we know it on what we think will be a strong third. So again, thanks, everyone. Have a good day.

Operator, Operator

And this will conclude today's conference call. If you'd like to listen to the telephone replay of this call, it will be available in approximately 4 hours and will run through August 1, 2021, by dialing 888-203-112 and referencing the passcode 8424776. 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.