Q4 2019 Earnings Call
My name is Amy and I will be your conference operator for today.
At this time, all participants are in 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 noninterest expense.
Actual results could differ materially from those discussed today.
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 dates 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.
Thank you Amy good morning, and thank you for joining National Bank Holdings fourth quarter and for year 2019 earnings call I have with me, our Chief Financial Officer oldest Perkins and Rick Newfield, our chief risk management all for sure.
We're pleased to report record for your earnings of $2.55 for sure.
We benefit from having strong teams operating in high performing U.S. markets.
Our relationship banking model continues to yield solid loan deposit and fee income growth and oldest will be covering these results in greater detail in just a moment.
We believe we're well positioned in 2020 to create meaningful value for our shareholders and other stakeholders. Our focus is on delivering solid growth maintaining a low risk profile and continuing our track record of improving our productivity oldest thank you.
Hi, good morning.
2019 wasn't very strong year for us on many fronts.
Before I move onto the fourth quarter to view and the 2020 gardens I would like to recap our financial accomplishments for full year 2019.
I didn't mention we finished the year with a record annual learning so $2.55 per diluted share that isn't 18.1 person earnings growth over the prior years adjusted EPS.
We grew our quarterly average, earning assets by 5.5 person over the fourth quarter 2018.
The second you're in the ROE, we delivered $1.2 billion in your loan originations.
We grew our average non interest bearing deposit balances, 6.7% over the prior years fourth quarter and improved our non interest bearing deposit mix to 25% of total deposits.
We increased our not non interest income $12 million over the prior year, and we did that while improving our efficiency ratio to 61.15%.
As we look towards 2020 the guidance I will provide is based on an assumption that the current economic conditions will persist throughout this year and we will continue to see our local market activity all performed in national averages.
Also for Jack no changes in the current rate environment, but no further fed interest rate adjustments.
For the fourth quarter being reported 62 cents of earnings per diluted share.
This quarter's results reflected the expected seasonal slowdown in our fee income as well as the full impact of in both the September and October rate cuts in our net interest margin.
This quarter's loan production was $269.5 million.
Already mentioned for the full year 2019, or new loan originations were $1.2 billion.
In particular, we're very pleased to have delivered $781.7 million that production in loans to businesses driven by our continued focus on the relationships with small to midsize companies.
Our commercial balances outstanding increased 13.4% this past year.
In 2019, our originated and acquired loans grew a solid $339.9 billion or 8.5%.
The new loan production as well as our overall portfolio domain smell diversified across various asset classes and geographies.
The regional economies in our markets remain solid and growing.
Our small business middle market consumer finds generally maintained a positive forward outlook.
For full year 2020, we projected total loan balance growth to be into high single digits.
I also want to point out that going forward, we will no longer separately report loads, formerly accountant Andre Agassi 310, 30. So this guidance applies to total loans.
Turning to deposits.
We're very proud to have grown over average fourth quarter non interest bearing deposits by 6.7% over the same quarter in 2018.
Our total average transaction deposits grew 2.5% this past year, which is lower than we had projected but as we have discussed before our deposit strategy is based on capturing full client relationships.
During the quarter the experience multiple clients using their excess cash to pay down debt adjusted corporate structure. So use cash for other disbursements.
We expect it to capture these balances and 2020 and project out total average deposit growth to be approximately 5%.
As always our focus will be on growing our core transaction deposits.
Our fully taxable equivalent net interest margin for the quarter was 3.77% and now reflects the full impact of the LIBOR rate decreases.
We ended the year with $5.4 billion, and earning assets and projected grow earning assets to $5.7 billion to $5.8 billion by the end of 2020.
Assuming no assuming no further fed interest rate changes in 2020, the earning asset growth impact to net interest income should overcome that margin compression and be project. Our full year 2020, net interest income to be comparable to that of 29 team.
Moving on to credit.
Once again once again, we are proud to have reported a very strong quarter as it relates to our credit performance. We ended the year over the nonperforming asset ratio of 0.66%, which was down from 0.85% at the end of 2018.
It also reflected a decrease from 0.76% at September 32019.
The fourth quarters net charge offs were just eight basis points annualized.
What 2020 be forecast our loan loss provision expense to be in the range of $10 million to $11 million as we expect to covered both atoll total loan balance growth and net charge offs at about 15 basis points.
With regards to our Cecil day, one impact we anticipate an increase in our allowance for credit losses of approximately $5 million to $8 million.
Approximately half of this increases you went by the inclusion of acquired loans as well as loans formally accounted under assay three tenthirty, but then the model.
Rest of the increase was driven by the impact of the lifetime loss methodology as required by the new accounting standard.
As a reminder, we also continued to hold significant loan marks against the acquired loans that over time, we'll continue to be amortized through that through interest income.
Moving onto noninterest income.
Full year 2019, Buda quarter record non interest revenues driven by or mortgage business.
Continued to be very pleased how this mortgage activity acted as a natural hedge to the not to the margin headwinds during 2019.
Let me provide a little more colour on the mortgage activity. This past year for the full year 2019, all residential mortgage banking group generated 1.4 billion dollar some mortgage loans.
This was a 30% increase over the prior year.
The market rates are decreasing during the summer benefited from the high level sort of financing activity and our purchase to refi split for 2019 was 60% purchase and 40% refinance as a reminder, our longer term run rate for this business is closer to 80% purchase and 20% in finance.
For 2020, we project our total non interest income in the range of $76 million to $78 million.
Service charges and bankcard fees are expected to grow at mid single digits.
For the residential mortgage banking, we expect the purchase market to grow at 5% while their financing activity is expected to trend downward towards 30% of our overall residential mortgage production volume.
Regarding expenses, we ended the year on a good note coming in below our full year guidance.
Total expenses of $180.7 million.
In 2019 be benefited nicely from the Oreo and problem acid workout initiatives, which offset the higher commission expense from the residential mortgage business.
I'm good I'm proud to report that he had another solid year of expense control, which we will continue we reach we will continue into this year.
For 2020, we project our total expenses in the range of hundred $82 million to $184 million.
Embedded in this expense guidance is approximately half a million half a million to $1 million that related to Oreo and problem loan workout expense.
Excluding Oreo and problem loan expense, our full year operating expense is projected to be in the range of $181 million to $183 million.
Which represents a further decrease from the $184.8 million incurred in 2019 and reflects our teams continued focus on identifying operating efficiencies.
We're projecting to 2020 <unk> effective tax rate, we expect it to be in the range of 18.5% to 19%.
As always this projected rate excludes the ft adjustment on interest income.
As it relates to capital the finished year with a strong 11% tier one leverage capital ratio tangible book value ended the year $20.89 per share, which is an 11.3% increase over the prior year.
For 2020, we expect fully diluted shares outstanding to remain around 31.5 to 31.6 million.
I'll close by saying that I'm very proud to what of what our teams accomplished in 2019, which resulted in record earnings per share and record return on equity. We have built a solid foundation for continued growth in 2020, and I'm excited about our momentum going into this year.
That concludes my comments. Thank you all its and I agree with you were very proud of having delivered another record year varies representing an 18.1% growth over the prior years' earnings per share more important. We believe this was accomplished while maintaining a low risk profile and while remaining intensely focused on earning the full bank.
And ship of our clients.
As all the shared with you were pleased with our momentum as we enter the new year and while I believe the guidance Aldous shared with you as appropriate you should certainly expect us to work to deliver better than expected results on that note I'll stop and we'll open up the lives for your questions.
As a reminder to ask a question you will need to press Star then one on your telephone.
To withdraw your question please press the pound or hash key.
Please standby will be compiled acuity roster. Thanks, Jamie.
Your first question today comes from the line of Chris Mcgratty with KBW. Your line is that morning, Chris.
Hi, everybody.
Maybe just on loan growth Tim.
Well go up in the fourth quarter little soft could you speak to the client activity pipeline today.
And obviously, the you're talking about high single digit growth next year. So it seems like a little bit of a one off this quarter, but any color on growth to be right. Yeah. Thanks. Thanks for asking the question and oldest and Rick feel free to jump in here we did.
See something that was rather unusual that we actually will.
In many respects view it as a positive reflection on on the quality of the loan book we saw.
A substantial number of clients paying down there revolving lines of credit using excess cash on their balance sheet at quarter end to reduce debt and pursue other activities in and all this I think it's fair to say and I want to point out that in.
No cases, where are we talking about having lost clients. These are revolving lines that naturally move up and down but the anomaly in the fourth quarter was almost 60 $65 million swingers at two how's it going as well. This is more of 50, yes, Chris good morning in the fourth quarter result.
This follow in the fourth quarter be a revolving lines drew net $1.7 million while in the prior fourth quarter average for that was about $49 million. So thats the call. It 50 $50 million round that up swing that we were counting on did not experience it but the Tim's point.
The good news here is that.
If you didnt lose clients they used to excess cash partially that impacted somewhat the behavior and deposit side as well as I mentioned in my prepared remarks, whereas our clients just a found themselves to be in very good solid position heading into the ended the year I think I think the last thing I would add is in terms of.
Net production in the quarter in terms of working with existing and new clients. We tracked very well. So we really feel like we were able to isolate this fourth quarter anomaly and.
Again.
And I think that answers your question about as well as we could answer Chris.
Great. Thanks.
Maybe a question on capital could you just entered new year remind us refreshing the priorities.
It feels like organic growth semi annual dividends, but maybe speak to the other two.
Buybacks or inorganic growth thanks, right right we.
Look we're actually pleased with the level of acquisition activity and opportunities and our market. We've said consistently that we believe operating with excess capital would.
Put us in a position to take advantage of the right opportunities. Unfortunately candidly as we looked at a number of situations. We found that the credit books that the loan books in a number of these situations just we're not something we could get comfortable with but but we're actually.
Optimistic that they're there can be some intelligent.
Strategic in market kind of acquisitions in 2020 that would.
Frankly give us an opportunity to.
Not only expand our market share in these markets, but realize some other efficiencies and pull some other levers that that.
Our in front of us.
When you say strategic does that does that code for larger deals being contemplated.
Well, either obviously the popular discussion point today, but what do you mean by strategic yeah. Thank you what I'm really referring to is acquisitions that would complement our existing activity in advance our current strategy and one. Good example would be and I think at least one analysts is called this out.
As we came into the year, we recognize we have opportunity as we see more and more of our clients move toward our digital platform in the consumer world to think about levers we can pull there and we think we've gotten pretty good.
Pulling those levers in the experiments we've done in the past and the opportunity to continue to grow either organically or through acquisition and then apply this practices to on acquired target could be a very very interesting and we consider that strategic.
Got it thanks to you got.
Your next question today comes from the line of Gordon Maguire of Stephens, Inc. Your line is open I ignored.
Tim How're you doing well thank you good.
So I'm trying to do some back at the envelope math on the expense guidance, if I back out the swap adjustments this quarter and the problem asset expense it looks like Fourq you expenses run rate about.
$186 million range, and if I kind of backing the envelope the mortgage fee guide it seems to be about $2 million lower year over year. So maybe.
Your expense guidance would imply that.
Wouldn't it sorry, the Fourq you run rate would imply about.
185 million run rate for 2020.
The change in mortgage.
So with your guidance of 181 when a three.
Thanks for net problem assets I guess.
What's driving that churn in that fall out no you just referenced some of the digital strategies being able to maybe consolidate a little bit but.
I guess I would've expected you talked to drive some year over year growth is there anything specific you can point to that.
I would have expense fallouts this year.
Yeah. It's.
Pretty much every line category you as we looked at looking at 2020.
And the margin compression challenges rail and be challenged our teams to to be very smart and strategic on how and where we spend money.
And yes, Utah, we continue investing Utah, so if you isolate it Utah year over year. We've done is actually an increase in expense for for us.
But it's going to be compensation in some parts. If you think about a four banking center closer to the announced last year.
Be said 800000 dollar onetime charge that we learned that earn back within a year. While that's about 800000 annual run rate that we are taking out.
Other initiatives that are in there that I don't want to go into detail here, but there's a lot of lot of a lot of pieces to be looking out there, making sure that to be taking out expense.
The other way.
Currently how we look at it maybe a little bit more color hobby lobby.
Managing expense and it might be helpful is really three components right. There is that core there is a mortgage variable rate.
Compensation that comes into play and then there is that Oreo write and as I said this going backwards from those in the water of how we mentioned Oreo. This year is going to be that cost us about <unk> million to have to sort of half a million said million.
Is going to come in chunky, so it's hard to tell which quarter comes through in terms of.
We have few properties to begin to look to liquidate Gordon I'll also add to that and I will complement you on some analysis you did coming into the years that that you're instincts are are we think accurate we're not ready to talk specifically about other levers that can be pulled related.
Other work in those those levers in the impact of those levers are not impact are not included in the current a forecast that all this is shared this morning. So.
Again, a bit premature to be talking a bit debt in more detail, but but.
We recognize there are other opportunities in other levers out there related to our expense run rate, but and then.
Finishing my thoughts in terms of those three components mortgage compensation variable compensation.
He is about 30, 536% of the gain on sale that you've seen a fee income and that in terms of a timing that will be again seasonally driven in which quarter b.
Heavier in the summer months.
And then the rest of kind of the core so hopefully that helps.
It does help thank you.
Audits the guidance for total deposit growth I believe.
Mid single digits.
Did you mentioned that the mix the expectation for the mix of deposit growth.
Don't break that out to be too.
Our.
Approach clearly is on the relationship banking so for US it is growing starts with going checking accounts and then.
Everything after that.
So we don't necessarily target of mix, but are we talking 5% overall deposit growth and I think our track record speaks for itself, we don't lean into the CD market. The brokered money market I mean, our our belief is that as you're growing these relationships, particularly with small and midsize business that year.
Picking up.
Track deferred balances and did more important are equally important sticky balances so.
I think reflecting on his store mix at least over the last year or two would probably wouldn't you say would be a good yes.
Burner, yes.
Got it and then just last one bleep securities are kind of getting real close to the 50% of assets. So the is the expectation to start growing the securities portfolio next quarter.
Yes, the expectation is to maintain investment portfolio at the demo out and about 15% of our toll earning assets I'll throw in that mix also out of kind of free cash so.
The investment portfolio purely for liquidity management.
And we feel like the combination of cash and investments should be around 15% of our earning assets. So as out earning assets are going to grow next year, you'll see that you can start adding on investments.
Got it.
Got it thank you.
You bet. Thank you board.
Your next question comes from the line of Jefferies. Please.
Davidson Your line is open.
Hi, good morning, especially Jake Cert on for Jeff Rulis.
Jake Jeff had given US a heads up you are.
Going to be joining us so thank you and what questions can we answer for you. Yeah. Thank you are absolutely. So first first and foremost on just some thoughts on the mortgage business going forward, that's an area you'd like to invest in more or is 2020, a year to look at areas to drive efficiencies are cream costs, where you can.
What do we think about the mortgage business is that.
Generally speaking.
We expect it to contribute in that 10% to 15% range of our total revenue in contribution and and really would view.
Any periods of time, where we might be exceeding that is anomalies just related to very healthy markets than in the opportunity to serve clients in our existing markets. So while while we may grow in certain markets incrementally I wouldn't say, it's a business that again, we expect.
Grow to a point, where it would be contributing beyond 10% to 15% of our total business.
Just a little color this past year in last quarter, but also for full year.
Mortgage business it was about 14%.
North of 14% still still go over the 12 of them that 15% item that.
Threshold that Tim mentioned, and obviously 2019 was a very healthy year for mortgage so.
Theres opportunity to grow and growth as part of our total company between are going to oversee emphasize it and I guess, what I would add is and I'm very pleased with our residential banking team leadership and one focus that we do have as we come into 2020 is really doing.
Even better job of the connectivity between our consumer bankers in our mortgage bankers and ensuring that we're.
Expanding our consumer relationships when and wherever it makes sense.
Wonderful appreciate the color on that and just a couple of questions regarding M&A.
Well or are you guys seeking any opportunities from a fallouts from past deals I guess.
Generally.
That's interesting I would I would I can't think of anything that we've looked at in the last four months maybe run. All this is looking at me fund I can't think of anything that we've looked at in the last four or five months that would have represented a fall.
Well from another bank if anything we've looked at a number of situations where it just.
Did not make sense.
For us to move ahead.
Okay. Okay. Thank you and then.
I guess second question follow that up would be a give you guys had any talks I guess less or more than I guess six to 12 months ago.
Any I'm sorry expand on that I may have missed the.
Yeah, I know I was kind of referencing on have you guys had more or less talks.
Hi, good activity activity wise, yes, it's interesting yes active is really picked up in the last six months.
Okay. Okay. Thank you and then next question that tangible comedy tangible common equity was well above 11% now with some seasonal clarity is there any plans to get more aggressive with capital deployment.
Well.
Again, we're a bit like a broken record we continue to believe that operating with a.
Slightly higher level of tangible common equity gives us optionality. We believe we're in good position given our capital levels and and earnings as we looked at 2020 to continue our track record of increasing our dividend.
Twice each year we.
Certainly our I'm encouraged around the level of M&A activity that we're seeing that could make sense for us and then finally, we've never said, we won't buy back shares it remains an option it's not.
Focus at today's price, but we certainly stand ready or maybe the best way to put it is we're certainly opportunistic.
On that front and we've demonstrated that in the past.
Wonderful. Thank you for answering that as well and just one last question I'll hop off here you mentioned that.
Looks like half a million to 1.5 million of your looks like.
<unk> expense will be related to Oreo and work out so of that have that range as it possibly could break that out for me Oreo and I guess workout costs.
For each one.
Yeah, it's hard to break them apart again at some of that or very much all of that depends on the timing on some of these oreo properties.
As we are able to liquidate them and therefore and as you've seen in the past for us that predicting the timing is very difficult as though so complex kaka complex contracts.
So I despite that I think I'll stick with my overall guidance and.
For those of us that are newer to our name.
We've had some incredible years in the past.
Realizing some very nice gains on the.
The.
On on the acquired or where you again, a reminders we're talking about a bulk of this these are from the.
Previously acquired troubled institutions and it's been a very nice profit center for US we expect some nominal pick up here in 2020 not at the levels. We saw in 2019, but we do see some upside over the course of of the year on that front.
And maybe sense Jake you asked about to Oreo.
I will just since we have Rick with us our chief risk management executive.
Now I'll, Rick I would ask you to share your views just broadly on 2009 teens performance from a risk management standpoint, and your thoughts on our loan portfolio and.
But risk management as we move into 2020 sure Tim let do that good morning, everyone look I feel very good about how our loan portfolio performed in our overall credit quality in 2019 and based on our credit metrics at year end.
Our company is well positioned as we head into 2020, we improved our classified loan ratio by about 30% year over year with that classified loan ratio improving from 1.24% at year end, 2018% to 0.87% year end 2019.
It's also important to note that our classified loans are diverse and granular with no systemic or industry sector trends that I would note.
Our nonperforming asset ratio is all just pointed out improved from 0.85% at year end, 2018% to 0.66% year on year end 2019, and net charge offs for the 2019 year, we're only 20 basis points.
But maybe taking a step further Tim I'll remind you that we conduct stress testing twice a year with one of those tests being conducted by third party.
Based on those results, we believe our loan portfolio will hold up Paul to a range of economic scenarios to a large degree I believe this is driven by the granularity and the diversity in our loan portfolio.
In fact, the average size of our originated commercial loans in 2019 was $783000.
Our discipline adherence to our concentration limits and our willingness to exit of business line as we deal with energy a number of years ago also contribute to the resiliency of our loan book.
Finally, our focus on minimizing concentration risk as well demonstrated by the level of non owner occupied commercial real estate at about 40% of our loans and just 92% of our company's risk based capital as well below the regulatory guideline of 300 person.
I believe the fact speak to the strong quality of our loan portfolio as we move into this year, Tim. Thank you Rick Jack I know Thats a lot more than you asked for but you up in that door and I want to get brick a chance to provide.
Everyone on the call with his observations on risk management.
No. That's that's absolutely. Okay. Appreciate all the color you get provided and thank you for answering my question you bet Good day.
Ladies and gentlemen, as a reminder, he would like to ask a question. Please go ahead. Please press Star then one on your telephone keypad.
Your next question comes from the line of Andrew license of Sandler O'neill.
Line is open.
Yeah, Hi, actually Piper Sandler now.
That's yeah, Yeah, that's interesting yeah.
You know you've answered most of my question.
I was curious if you if you look at your growth outlook for this year, how do you view it from a geographical distribution I know you're pretty optimistic about Utah in that market is performing well and you're in some other markets that are also doing very well, but these are also very competitive.
Just how do you did you see gross loan growth playing out this year from yeah from a geographic standpoint.
Yes. So so look virtually every market we operate in continues to perform better than the national averages on on almost any economic met measure you could evaluate and so.
Colorado.
Just continues to be a force we're fortunate to be based here, we're excited about the prospects that ongoing prospects here.
We find the competition in this market in the Colorado market to be for the most part very rational there is some smaller community banks that occasionally will will kind of do things that we scratch your head over but broadly speaking we believe it to be rational market. That's certainly the case.
The Kansas City Overland Park market major players there tend to be very.
Rational and we really like competing in that sandbox and you know as we've said before we feel like that Kansas City Overland Park market is a bit of a hidden jewel I think more and more people are coming to appreciate it every day.
We've seen in the last year year and a half.
Our Texas.
Activities only pickup in growth that's really.
Dallas and Austin based activity, which we feel good about and we certainly are excited about what we're seeing from our teams in Utah, which I'll remind you were in that market I'm really focused on small and mid size banking, we do have a small mortgage team there.
We may be adding this year, just a very small kind of premier consumer bank.
Coverage just to support.
Our our business clients personal needs, but the real opportunity and you tie has been in that small business mid sized business space. So I as as a you'd think about each of those markets. We I just discussed they're all they're all great markets to be in and we.
Feel good about all of them.
Okay.
Thank you you know you've covered everything else I wanted to ask today so.
Thanks, so much thank you very much Andrew.
Hi, 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.
Thank you Amy I do want to thank everyone.
In particular, the participants that were asking questions. This morning as always we're open to any follow up questions for clarification. Thanks for joining and have a good day and we'll be talking again soon bye now.
This concludes today's conference call.
If you would like to listen to the telephone replay of this call. It will be available beginning at approximately two hours and will run through February 2020 by dialing eight five psi.
Five nine.
205.
Our four here for 53734 years.
And referencing this conference I'd.
Yes.
To the rest.
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. Thank you may now disconnect.