Q3 2020 National Bank Holdings Corp Earnings Call
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Good morning, everyone and welcome to the National Bank Holdings Corporation, 2023rd quarter earnings call. My name is Mariama and I will be your conference operator for today.
At this time all participants are in a listen only mode. We will conduct a question and answer session. Following the prepared remarks.
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 strategies loan deposit capital net interest income non interest income margins allowance taxes and non interest expense actual.
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 reckon.
Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release is posted on the Investor Relations section of Www Dot National Bank Holdings Dotcom. It is.
It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation Corporation's Chairman, President and CEO Mr., Tim Laney. Thank you Mariama. Good morning, and thank you for joining National Bank Holdings third quarter 2020 earnings call I have with me, our Chief Financial Officer oldest Perkins and risk.
New film, our Chief risk Management Officer.
I'm pleased to share with you that despite pandemic related challenges, we delivered record earnings during the third quarter on the strength of record breaking the Amcom we.
We continued to maintain a risk off position on our balance sheet with the goal of being well prepared to address any further economic downturns should they occur.
Having said this we clearly benefit from operating in markets that are better performing better.
Most of the country.
The diversity and granularity of our credit portfolio continues to produce solid results with annualized net charge offs of just four basis points. In fact, we have experienced continued improvement across a broad set of credit metrics during the quarter.
While growth in deposit balances has practically then a given during these times I'm, particularly pleased with the growth in new Treasury management relationships we've experienced.
Finally, we continue to prudently support our clients and communities and we're proud to have recently been named Colorado is 2020 job creation bank of the year by the small business administration and on that.
And on that note, Rick I'll hand off the call to you.
Thank you Tim and good morning, everyone I'll cover three areas of my comments first I'll briefly summarize our third quarter credit metrics and performance second I'll discuss the status of our Kogut related modifications and third I'll describe the actions we continue to take to reduce risk on our balance sheet, while working to prudently support.
Clients.
We expect to our credit metrics trends held up well during the quarter.
I'll note that the asset quality ratios I'm about to cover excludes a paycheck protection program loans, thereby showing a more conservative view of asset quality while.
While our non accrual loans decreased during the quarter a corresponding decrease in loan balances led to our non accrual non accrual ratio remaining flat at <unk>, 0.45%.
Our criticized loans also decreased during the quarter our.
Our total nonperforming asset ratio improved from <unk>, 0.60% at June 32.56% as we not only experienced a decrease in non accrual loans that had meaningful reductions in Oreo in the quarter.
30 days plus past dues remained very low at 60 basis points and net charge offs for the quarter were only $486000 or four basis points annualized.
The stable credit trends reflect our conservative underwriting standards and our enhanced loan portfolio management as a pandemic and economic stress continue.
As Tim said, I believe being in markets, which have generally fared better with the pandemic as evidenced by unemployment levels lower than national averages are also favorably impacting our loan book and underlying clients.
During the third quarter loan modifications declined $327 billion to $165 million or 3.9% of our total loans, excluding TPP exposure.
It's important to point out that 95% of these modifications still require monthly interest payments versus full payment deferrals.
With respect to any second modifications, we've extended the clients those have generally been predicated on receiving cash equity infusions to build reserve accounts loan pricing considerations and more restrictive loan covenants.
The vast majority of our clients have stabilized revenue and expenses at sufficient levels to cover debt service a contractual levels.
In fact outside of our hotel loans, we have kobin modifications in place for less than 1% of our loans.
As a reminder back in June we began working with our hotel clients on a conservatively forecasted path to sufficient occupancy and average daily rates to represent re stabilization.
Based on any operating deficits and ongoing interest only loan payments each client was required to infuse additional cash equity and agree to certain additional loan terms today.
To date, we've successfully negotiated such agreements with the majority of our hotel clients, we benefit from our conservative underwriting of this portfolio and are further protected by an average loan to value of 58%.
Given the additional equity infusions and other enhancements to our loan structures I believe our hotel exposure is well positioned to weather the protracted stress from the pandemic.
Tim myself and our banking teams continued our intensified portfolio management during the third quarter and are making and are maintaining this robust vigilance currently to put this effort in perspective on a weekly basis, reviewing all commercial and specialty banking clients and business banking clients with either larger credit exposure.
As yours or within Iris sectors.
During these reviews, we assess each clients currently weekly revenue versus revenue levels required to cover the clients expenses.
And full contractual debt payments.
We discuss operating status to the extent impacted by endemic driven jurisdiction mandated restrictions as well as weekly and trailing four week trends.
This enables us to quickly detect credit deterioration and to take action proactively where needed as we continue a risk off approach to our loan portfolio.
Given the Pandemics continuing impacts is noteworthy where we have no direct exposure aviation cruise lines malls energy services casinos and gaming convention centers in hedge funds, we have no dealer dealer floor plan no indirect auto no car leasing and no consumer credit card.
Exposure.
I believe maintaining a diverse granular loan portfolio as a strength.
Also we've conducted twice a year stress tests on our commercial loan book. The most recent of those test was completed in June by an outside party with a focus on lingering impact in stress from the COVID-19, pandemic and elongated path to recovery over the coming years.
And the most severe scenario models, which assumes a wee L shape recovery, we remain very well capitalized.
Given the risks that commercial real estate, particularly office and retail will experience further pressure I'll also point out the non owner occupied commercial real estate is only 50% of our total loan portfolio excluding people a few loans.
Furthermore, it is only 85% of our risk based capital and what we have is conservatively underwritten relative to loan to cost loan to value and other key metrics right.
We are well diversified across industry sectors with most industry concentrations at 5% or less of total loans and all concentration levels remain well below our self imposed on us and with that I'll turn the call over to all of us.
Thank you Rick and good morning.
In my remarks, I will review this quarters financial performance, which once again highlights the strength and the resiliency of our bank also.
Also during this call I tend to provide limited guidance for the rest of the year, but the recognition that we are still facing a great deal of economic economic uncertainty.
Isnt shared with you for the third quarter, we reported record quarterly net income of $27.9 million or 90 cents per diluted share.
After adjusting for the previously announced banking center consolidation expense.
Our quarter's adjusted EPS was 91 cents or 2019 or 20.
29 cents increase from the prior quarter's adjusted results.
This quarter's 50 pretax pre provision net revenue totaled a record $37.2 million as we took advantage of favorable mortgage market conditions, which more than offset the headwinds, resulting from the zero rate environment.
The third quarter's new loan production reflects our careful approach to evaluating and taking on new credit risk.
As we continue to operate in a risk off mode. The new loan fundings this quarter were $132.9 million, which can.
Which combined with careful client management in regards to credit and yield resulted in a total loan balance decrease of $226.3 million during the quarter.
Moving to deposits, we continue to see strong deposit inflows from both our existing clients as well as newly opened accounts.
The average transaction deposits deposit balances grew a very strong $316.6 million or 30.3% annualized.
Total deposits grew to $306.8 million or 23.4% annualized.
Total deposit cost decreased seven basis points to 40 basis points this quarter.
The continued deposit growth contributed to a solid 12.3% annualized increase in average earning assets.
I've ever the earning asset mix this quarter move towards lower yielding cash and investment securities, which resulted in the fully taxable equivalent net interest margin decreasing to 3.21%.
We estimate approximately 13 basis points of the contraction this quarter was due to the excess cash balances.
And given the lack of attractive investment investment alternatives, we expect the elevated cash position to remain through at least the end of 2020.
Rick already provided a detailed summary of our credit trends. So I will just touch on the provision expense and allowance this quarter.
As a reminder, our seasonal model incorporates moody's macroeconomic forecasts and the impact of the forecast changes. This quarter did not result in material changes in the allowance requirement.
As such this quarters provision expense totaled $1.2 million and include coverage for the for the quarters net charge offs of just $486000 and unfunded loan commitment provision expense of $200000.
We finished the quarter with the Navy seals, the total loan ratio, excluding pvp loans of 1.45%.
Factoring in existing loan marks against previously acquired loans. It takes our loan loss coverage to 1.75%.
Turning to fees.
Our residential mortgage group had another strong quarter, but a strong quarter with both elevated loan originations and strong gain on sale spreads.
During the third quarter, we realized record non interest income of $44.5 million, which was $5.7 million or 14.7% higher than prior quarter end.
And while we benefited from strong mortgage market activity I'm also pleased to report that our core banking fees are showing signs of recovery after being significantly impacted by the pandemics related economic slowdown.
Both service charges and bank card fees on a linked quarter basis, and the bank card fees this quarter exceeded the prior year's third quarter revenue by 7.6%.
With respect to mortgage loan production this quarter. It was another all time high for the company.
$752 million dollars in loan originations.
But an increase of 55% from the same quarter last year.
$323 million or 42.5% of this quarters production was in the purchase market as we continue to benefit from operating strong local economies.
During the quarter, we were also able to maintain elevated gain on sale margins.
Both primary and secondary spreads remain wide.
Going into the fourth quarter, we expect some of that margin to come down as the purchase volumes decline given the typical seasonal slowdown during the winter months.
As we discussed during last quarter's call. We are taking several actions this year to manage expenses.
And I'm happy to report that the banking center consolidation efforts announced last quarter are progressing smoothly and we expect virtually all fall banking centers to be successfully absorbed for them, but then the rest of our network by the end of the fourth quarter.
As part of this transition during the quarter, we realized $400000 in consolidation related expenses compared to $1.7 million of such expense in the second quarter.
Total non interest expense this quarter was $55.3 million, an increase of $1.6 million from the prior quarter.
Adjusting for the banking center consolidations the linked quarter expense increase was primarily driven by the variable compensation related to the strong mortgage banking activity.
Finally during the quarter, we once again improved our regulatory capital and liquidity positions.
Our CE tier one ratio increased 104 basis points to 14.25% and we grew our tangible book value to $22.40.
Loan to deposit ratio improved to 81.1% and our excess cash position at quarter end was approximately $400 million.
We believe we are very well positioned to weather any further downturns in the economy.
With this I will turn it back to you. Thank you. All this is all just pointed out we believe that our strong common equity tier one ratio of 14.25% enables the bank to navigate this challenging economy from a position of strength.
We remain flexible and opportunistic with a focus on delivering our dividend while growing our tangible book value and delivering a solid return on tangible common equity.
Risk management policies and practices are producing desirable results and our residential banking business continues to be an effective hedge against lower yields on the loan book.
I'm very proud of my team mates efforts to support our clients and communities, while working to deliver solid results for our investors Mariama, we're ready to open up the call for questions.
Thank you as a reminder to ask a question. It is star one on your telephone keypad. If you would like to remove yourself from the queue is the pound sign.
Please hold while we compile the Q and eight roster.
Your first question comes from Jeff Rulis with da Davidson Your line.
Your line is open good morning, Jeff.
Hi, good morning.
Maybe I'd.
I'll start with a question for you on.
The sort of local or just maybe the Colorado footprint.
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Certainly the wildfires and and while those are mostly north of Denver.
Also looking at sort of a an increase in some of the cobot cases, so potential for a pause on reopening or or slowing that down.
Just those headwinds as you layer it in obviously, a favorable long term demographic trends out west, but any if you could assign any.
Impact do you think those pressures might have.
Over the short line call it the next several quarters.
Not not unlike most states in the United States, we've seen an ebb and flow in terms of rise and fall of coated rates and I think your broader.
Observation is what's important we're seeing on a month by month week by week basis, a very positive net inflows not only in the Colorado one of our core markets, but we're seeing the same thing in Utah, We're seeing the same thing in the Dallas and Austin markets, where we're operating so.
Well I am not ready to speak to where let's say co that infection rates may be reported week to week. What I can tell you is the the fundamental positive impact is that we operate in markets that opened up more than certainly the coastal markets in the United.
States. So we benefited with a more back to business attitude. There at the same time code that rates have been manageable and.
And we're certainly benefiting from this inflow of new residents that that continues to be very very powerful.
Right and as you.
Tim you, taking a pretty cautious approach the last couple of quarters in terms of your risk off type commentary as we transition into that into 21.
You get the sense that.
What triggers a risk on or or even just good risk neutral.
To kind of digest towards.
A more even keeled in terms of the landscape, obviously, a lot could play out but just your thoughts on how gross returns.
Kind of what triggers that you know it.
It's it's really it's a great question and I'm reminded of that answer that someone once gave them some topic, where they said I'm not sure I can explain it but I'll tell you all know it when I see it and it feels that way I'll tell you where we are cautious.
And it doesn't have much to do with the markets that we do business and but it's a broader macro question and that is if corporate America continues to announce these larger Paul at White collar job layoffs. The question is what impact is that ultimately have on the economy and.
2021.
And while you know we like most people want to be very optimistic and celebrate.
Return to solid growth.
Solid growth rates, we're going to be cautious we feel like that's our job and we will continue to protect the balance sheet now here's the good news given the markets. We're operating in we are our bankers are active our bankers are back out in the market and we're seeing a nice growth and opportunity.
I would just simply say that the filters the added filters, we've put in place as it relates to bringing.
New clients into the bank is greater and will that.
Come to a close at the end of the fourth quarter of this year at the end of the first quarter.
Next year I can't really answer that question today, I think we'll know all of US all of US we'll know more as time goes by here, but very good question and that's the way we think about it.
Maybe just a last one for although students.
Got a two part.
And maybe not super specific but I'm trying to mesh the outlook for.
Fee income and expenses and obviously mortgage is got a lot to do with that I. Appreciate your commentary about.
What do you think margins due in the fourth quarter, but you know we extended the 21.
You've had your branch consolidations that kind of filtered in I guess, the thoughts of what you've done on the expense side the variable inputs from the mortgage units.
I don't know if it's run rate specific I think you've kind of pulled back guidance, if those specifics given the environment, but maybe you could.
Just two on the fee and expense side would be helpful. Yep.
Yeah, I'll start with the expense clearly elevated expense this quarter, given the variable compensation component than mortgage.
That's the based on the record earnings.
We'll take that all day long we are benefiting.
Benefiting very much by the increased spreads in that market as well so that the relationship of the variable compensation on the mortgage to the revenue.
But a disorder than helping out.
I'm, hoping are helping our efficiency ratio. If you look at the line items, though in the in the table in the earnings release and compare them third quarter of this.
And compare them third quarter of this year versus the third quarter of last year, you'll you'll see that we've been able to hold all other line items except for four.
Salaries and benefits in line and check and that's just a continued focus on expense management to date and on go forward basis, we'll continue to do that the 12 cents to 12 banking center consolidation is the Prime example, and that will benefit as we close these banking centers here this installed.
Them this quarter that will benefit will kick in starting next year.
Oops of mortgage compensation, and how that that South Dakota, Phil Phil Centre that salary expense I would.
I would say fourth quarter for kind of thinking about.
For every dollar of gain on sale to be report typically doesn't relationship had been about.
About 40% of that would have increased and flown into that salary and benefits line.
Given the elevated margins is kind of dropped to 30%. So that should give you a little bit of guidance in terms of how we look at that.
Now moving on to fees.
Very very excited about the core banking fees returning to more normalized levels I think volumes are.
Service charges and analysis fees on growing the lease fee line item that is still underperforming is not overdraft fees, but that's understandable given the elevated deposit balances. So we not too worried about that bankcard fees showed very strong third quarter and look to continue here in fourth quarter.
With regard to the mortgage.
As you know, we certainly benefited from that has been a great hedge two daughters margin.
Margin.
Going into winter months at least for the fourth quarter, certainly expect certain slowdown here, but starting to see that here in October already.
How much it's hard to say, but you know our guidance is sort of what kind of guide post is what can be a says and they say about the 25% to 35% higher volumes. This fourth quarter than last so I think that would be probably a good guide for you on on on that line item.
I've just got to come back and say on expenses that work, we're going to continue.
To work to realize additional expense reduction in our company, we have a track record for doing that pandemic or not that's a focus and it'll continue to be a focus and it really as it relates to our margin I still believe Weve got room at 40 basis.
Some cost on deposits to continue to bring our deposit cost down as well, particularly as they continue to grow at the rates we're experiencing.
Okay, not easy question, so lots of APAC there I appreciate it.
Okay.
Your next question comes from Andrew Liesch with Piper Sandler Your line is open.
Hello, Andrew.
Good morning.
Just looking at the mortgage line, if you look at where the pipeline stands right now and in the capacity that.
You guys have been moving through the pipeline and do the re Fi is in an approved purchases I mean, how stressed.
Are your employees I mean.
Are you having to push out and maybe.
Maybe delay some of the production until the first quarter, just kind of curious like where the pipeline stands how busy your folks are and.
If we can continue to see the big refi volumes going into next year.
Right.
I believe we will and not just re fi, but to the extent there is product available just given the influx of new people into the markets. We do business and we're going to continue to see that new homeowner acquisition business so to answer.
To answer your question candidly, yes, I couldn't be more proud of our team mates in this area. They have been running marathons NAFTA marathon stepping up leadership has been strong our teammates have have just then.
So focused in particular on helping people realize the dream of home ownership and I think we all get how powerful that is and you know we're we're certainly.
And I'm talking almost more certainly couldn't be more proud of our mortgage bankers, but when I really look at what our teams are doing behind the scenes.
To make this work.
You couldn't ask for more we were looking at different ways of rewarding those teammates recognizing those teammates and they're strong they are up for the challenge and.
As the old saying goes we understand we have to make hay, while the sun shining so that's the mindset.
Understood makes sense.
And then on the credit.
The credit fronts.
Obviously, good good trends there with nonperformers in charge offs and with loans declining I guess, they've also kind of supports the lower provision along with this kind of risk off mentality, but yes.
And then a lot of the provisioning and reserve is all about also driven by seasonal but do you have any expectations on where this on where the provision can come in.
Until you start.
Go back to maybe a risk neutral stance.
I'll start this is all this.
I'll say that.
Given where the Moody's outlook is we certainly did not have to record the huge provision expense this quarter. The model actually show that we are adequately reserved.
And I'm currently that's very difficult to answer where the future bulk will be you will be driven by really two points right were where this the economics of.
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Develop.
Development goals and the future outlook for it because if there is a and other W. Type of past certainly you could see further pressure to build a a seal that's one and secondly, the loan growth in hand or mix of the loans will depend will drive that quite a bit too.
And I would just add again when you factor in existing loan marks against previously acquired loans. It does take our long coverage to 175, some might argue given performance of the portfolio that is high but I would I would rather be in a position of maintaining a high level of reserve, while we wait.
To have more of these questions answered around the economy.
And be in a position where the model was telling us to release later than.
Then to do something prematurely and we're certainly not in any way shape or form.
Going to be pressing on the model to try to create early releases, that's just not ours our game plan.
And Andrew This is Rick maybe just quickly I'd add mentioned this a couple of times, but again because of you've heard our comments about the view of uncertainty in the economy and that is why we're maintaining the level of diligence around our existing loan book to be proactive and so I think that in conjunction with again.
With all this said around the Moody's forecast will have an awful lot to do with where we see seasonal.
Okay.
Thanks for taking my questions I'll step back all right. Thank you Andrew.
Your next question comes from Chris Mcgratty with KBW. Your line is open good morning.
Hi, Good morning, this is actually I'm, Kelly Motta on pilot or Chris Hi.
Turning now to asset class.
Moving on to capital you are.
You obviously.
Built a lot of capital this quarter and kind of.
Kind of in a high class problem and that it probably will continue to build all else equal.
All else equal.
To next year, and then as the picture becomes clearer how are you speaking.
About deploying.
Deploying your strong capital base and as if you could also perhaps comment on M&A in and what it would take on.
Ticket that market down.
Up and going again that would be great. Thank you Kelly well what we.
We.
Well, we certainly didn't expect capital to build at the pace that its built and pandemic challenged year like we've experienced and to have our tangible book value now at $22.40 a share as we think pretty interesting.
So let me try to break it down first.
We fully expect to be able to protect our dividend.
During these times and that's a priority.
The second obvious.
Obviously.
Core to.
Maintaining a strong position in the market we expect to.
Support our reserves and ensure that we maintain a fortified balance sheet simply too.
Handle any kind of impacts that the market may throw at us with respect to M&A, we do think.
And the next 18 months that there could be some really interesting.
Tactical opportunities to fill in within the markets. We're in and we will pursue sue those when we feel absolutely confident that we can get our hands around the risk in the portfolios that we would be the credit portfolios that we would be acquiring.
And have the ability to mark those appropriately and again consistent with our history of acquisitions construct did a win win transactions, where the earn back on any kind of tangible book dilution would be reasonable.
Finally with respect to acquisitions.
Should we see another.
Dip in bank stock prices, including our own.
We have an authorized buyback we have no issues with regulators, allowing us to buy in shares and I can't think of a better acquisition, we could make then of our own shares.
If we hit certain prices and so that's certainly on the table as well as it relates to capital use.
That was really helpful. Thank you. So much you guys. Thank you Kelly.
Your next question comes from Andrew Liesch with Piper Sandler Your line is open.
Hey, Thanks for taking the follow up.
Just on the site if you have any expectations of timing of Pvp forgiveness and.
He is the dollar amount of fees that have yet to flow through the margin. Please.
I'll start and then hand, it off to Rick it's been interesting we've heard that there are some banks operating with this mindset of carrying those balances of maintaining those balances on their balance sheet I don't know if that's for optical reasons or or other reasons, but you know our our.
Our approach is to.
In addition ourselves to clear as many of those PPP loans off our balance sheet as rapidly as possible with the idea of driving yield our return on on those loans.
As high as possible, obviously that means working with our clients.
Good news is risks in a position to give you some detailed stats on where we're at on all of that and we're feeling good about our progress so without high level, Rick I'll turn it to you for some detail on a short term so Andrew just maybe a couple.
Couple additional facts there so as Tim said, our banking teams have been working very diligently with our clients to get the applications and execute on the forgiveness, which ultimately means loading all of that into DSP portal.
In terms of where we stand as of today last Friday and this is a daily sort of progress for US we had.
We uploaded a total of $145 million of Pvp loans forgiveness applications and Thats.
About 40% of our total PPP balances our focus just given the potential for changes in the under 150000 dollar loan processing has been on the larger loans that we process, 61% of those loans greater than 150000. So some really good progress that we've made over the last several years.
Particularly given that as I'm sure you know we've only had the.
The rules for forgiveness laid out here in the last couple of weeks. So we feel like we're off to a solid start.
Great Thats very good to hear thank you Okay. All right. Thank you Andrew.
Thank you 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 Mariama I will just thank you for your interest and wish you all a good day. Thank you.
And this concludes today's conference call. If you would like to listen to the telephone replay of this call. It will be available beginning in approximately two hours and will run through November 4th 2020 by dialing 8558592, 056 or four zero floor.
373 406.
During the conference I'd of 2.7178.
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.
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