Q4 2020 National Bank Holdings Corp Earnings Call

Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

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Good morning, everyone and welcome to the National Bank Holdings Corp, 2024th quarter earnings call. My name is Marianna 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 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 non interest expense.

Actual results could differ materially from those discussed today.

These forward looking statements are subject to risks and uncertainties.

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 Corp 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 provide useful information for investors.

Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations section of Www Dot National Bank Holdings Dot com.

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 Mary Alma.

And thanks for joining National Bank Holdings fourth quarter and full year 2020 earnings call I have with me, our Chief Financial Officer oldest Burkins and Rick Newfield, our chief risk Management Officer.

I'm pleased to report record full year earnings of $2 85 per share growing tangible book $2 20 during the year to $23 in non <unk> per share.

In the face of unprecedented pandemic related challenges.

Teammates came together to serve our clients and communities all while taking care of each other.

We continue to benefit from having strong banking teams operating in high performing U S markets.

We believe our relationship banking model, coupled with a disciplined focus on building a diverse and granular loan portfolio bodes well for our future.

Now under Cecil we billed approximately $17 $6 million, an additional provision for loan losses. During 2020, while realizing actual net charge offs of just $2 $7 million or only six basis points of total loans.

We actively supported our client engagement in the Paycheck protection program and to date, we've helped over 75% of our participating clients engage in the forgiveness process.

Before turning the call over to Rick.

Want to thank my teammates for their intense focus on realizing solid growth while at the same time prudently examining every opportunity to increase our productivity Rick Yeah. Thank you Tim and good morning, everyone I'll cover two areas in my comments first I'll briefly some.

Or is our asset quality trends during 2022nd I'll describe the actions we continue to take.

To reduce risk on our balance sheet and position our company to navigate sustained economic uncertainty, while working to prudently support our clients.

Spite the unique challenges presented by the COVID-19 pandemic our asset quality remained strong. During 2020. This is demonstrated by our ability to reduce non performing assets 13, 5% during the year with the nonperforming asset ratio of <unk> six zero percent at December 31, 2020 for.

Morris Tim shared in his comments, we accomplished this while only incurring six basis points of net charge offs for the year.

I'll also note that we ended 2020 with only three basis points of past dues 30 days for greater the lowest level in our company's history.

These credit trends reflect our conservative underwriting standards, we maintained since our company's formation as well as the enhanced loan portfolio management, we implemented in March I believe being in markets, which are generally fared better with the pandemic as evidenced by unemployment levels lower than national averages is also favorably impacting our loan book.

And underlying clients tell myself and our banking teams continued our intensified portfolio management through the year.

Maintaining this robust vigilance currently this enables us to quickly detect credit deterioration and take action proactively where needed for bottom line is our strong credit metrics and loan portfolio monitoring have positioned us very well as we've entered 2021 I'll now turn the call over to all of us.

Thank you Rick and good morning.

In my comments I will provide an update on our financial results and give guidance for 'twenty and 'twenty one.

For the fourth quarter, we reported 87 cents of earnings per diluted share and we finished 2020 with another year of record annual earnings of $2.85 per diluted share.

When adjusted for this year's banking centers center consolidation expense the full year EPS was a record $2.91.

The fourth quarter's loan production was $272 $5 million, which was double that of the loan production in the third quarter and a 1.1 per cent increase from the loan production during the same quarter of 2019.

Total loans outstanding this quarter decreased by $202 $4 million, and Houghton and $72 $2 billion. So that decrease was driven by a successful paycheck protection program loan forgiveness efforts other day.

For 31, B has received for giving US proceeds on 50% of the original outstanding PPP balances.

Depending on the SBA process and timing, we expect the majority of the remaining balances for the loans made in 2020 to be forgiven during the first half of this year.

We are seeing a solid economic recovery in our markets, but at this point, even with a COVID-19 vaccine being rolled out we feel it is too early to provide any forward looking loan growth guidance.

The solid deposit growth trends for the summer continued into the fourth quarter about average fourth quarter transaction deposits grew $172 $1 million on a linked quarter basis what for.

Eight 3% annualized.

The total cost of deposits decreased seven basis points to 33 basis points and our transaction deposit cost decreased three basis points to 15 basis points in the fourth quarter 2020.

The resulting fully taxable equivalent net interest margin was $3 two 4% in the quarter.

And the fully taxable equivalent net interest income was $49 $8 million.

This quarters net interest income included $5 $2 million from patient protection program fee recognition as compared to $1.5 million in the third quarter.

In terms of net interest margin this equates to a benefit of approximately 25 basis points.

The remaining unamortized P. P. P balance is $3 $4 million and as I mentioned before we expect the majority of those loans to clear our balance sheet. During the first half of 2021.

Additionally, we continue to hold approximately $500 million in excess liquidity, which has had roughly 27 basis point dilutive impact on the margin calculation.

The downward pressure on non margin from the excess liquidity will likely carry into 'twenty 'twenty, one and as of right now we do not expect to deploy the excess cash into investment securities.

Rick provided a detailed somebody on credit trends. So I'll just touch on the allowance the ACL to total loans, excluding PPP as at year end was $1 43 per cent. In addition to the ACO, we had $11 million in loan marks against the acquired portfolio.

These loan marks continue to accrete through net interest income.

And they also provide for additional protection from credit loss in that portfolio.

During the quarter, we had no provision expense the CSO model benefited from improvements in the current and forecast for the economic conditions, but that benefit was fully offset by our conservative stance on the qualitative factors.

Total non interest income for the quarter was.

$33 4 million or a 64% increase from the same quarter last year.

Continue to be very pleased with our revenue diversification and how the mortgage business provides a natural hedge to the margin headwinds.

I'm also pleased to report under the exceptional of overdraft fees.

Causes related service charges and bank card activity returned to pre crisis levels during the fourth quarter.

In 2021.

We expect to build on our fourth quarter's non mortgage related banking fee income trends and project. Our non interest income excluding mortgage gains to be in the range of $39 million to $41 million.

In terms of the mortgage business the volume should remain robust for the foreseeable future, but arent expected to decrease relative to the record levels. We saw in 2020.

We also expect that the lower mortgage volumes will likely reduce the very strong gain on sale margins that'd be all currently enjoying.

Based on how these trends play out because see mortgage related revenue for 2021 summer and the range of $60 million to $80 million.

Total non interest expense this quarter was $48 $4 million, a decrease of $6 $9 million from the prior quarter.

The linked quarter the linked quarter decrease was primarily driven by lower mortgage banking related compensation. In addition, during the quarter. We also began realizing expense savings related to the recently completed bank instead of consolidations.

To further our operating leverage initiatives. We are moving ahead with the seven additional banking center consolidations in 'twenty and 'twenty one.

Once completed this will bring our total total banking center network down by 22% as compared to the third quarter 2019, when we began these initiatives.

As a result, we project 2021 noninterest expense to be in the range of $182 million to $192 million.

Wider range provides for the mortgage related commission adjustments consistent with our fee income guidance.

Finally, we expect that 'twenty 'twenty, one effective tax rate to be around 18%, excluding the FTE adjustment on interest income.

And we expect fully diluted shares outstanding to remain around 31 million shares Tim without I will turn it back to you.

Thank you all this cover in a lot of ground. There, we believe our strong capital and liquidity levels enable our bank to operate from a position of strength.

Our risk management policies and practices continued to produce desirable results.

To that end yesterday, our board moved ahead of schedule to approve another increase in our quarterly dividend.

We believe we're well positioned to consistently deliver a solid dividend, while growing our tangible book value and delivering an attractive total shareholder return and on that point Maruyama I'll ask you to open up the call for questions.

Yeah.

Thank you as a reminder to ask a question you will need to press star one on your telephone.

Draw your question press, the pound or has key please standby, while we compile the Q&A roster.

Okay.

Okay.

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

Good morning.

Hey, good morning, Tim I'll listen Rick This is Levi on for Jeff Rootless greatly bank.

Thinking about your loan growth appetite and granular loan book can you speak to your philosophy about returning to.

For growth and does that happen across the loan book.

At the same time or you know are there segments. He may turn on sooner than others.

Right. So I think it is important to note that in the fourth quarter of last year, we saw a return to our historical levels of loan production and that is an indication that we have.

Opened our doors so to speak.

Your question is good as it relates to our segments that we might be.

More careful with those that are obvious or certain real estate sectors that we really had little to no exposure to in the first place, but youre talking about areas like retail and office and again, we're fortunate that there's just aren't areas we had.

Much exposure to know Alternatively, we've always operated with a relatively low level of commercial real estate exposure in general and.

We believe there are going to be some meaningful opportunities for growth in certain sectors. As we look ahead no better example would be real estate in the logistics space.

Supporting we're spending time with clients and prospective clients really looking at how we might better support the movement of product and goods shipping of products and goods through warehousing and and debt related real estate, we're seeing strong performance in a lot of our specialized.

Three groups.

You know, it's quite remarkable how well.

Quick service for quick service restaurant space has performed through this pandemic and I think some of the silver lining is what we're seeing is some new operating practices that are making for example that industry are a lot of players in that industry more profitable than ever before.

Trimming their expenses.

Managing their operating leverage and we like what we're seeing in terms of opportunities with the right operators in that space.

We also like on a geographic basis, frankly, the opportunity of continuing to play hard into the small and mid sized business commercial arena, we've seen where some of the larger institutions in the country have either shied away from serving certain elements of that market or have chosen to do it with one trial.

Do it with one 800 numbers and we don't think that's effective for serving our middle market.

Commercial business and.

We're more than happy to.

Run with our relationship model in that space, So, leaving I think I've given you two or three examples of.

Where we see opportunity and I would tell you that we're optimistic I mean, the reality of it is across the board. The markets. We operate in are performing more strongly than the national average on almost every economic metric you could look at more fortunate that our markets have been.

More often than not through on a relative basis through this pandemic and our clients are increasingly optimistic so you know.

Our posture as many of you know has historically been too.

Be conservative in our guidance, but then work very hard to over deliver I would tell you that's exactly where we stand as we enter 2021 conservatively postured, but very optimistic.

Thanks, Tim but that's helpful.

And then just one on capital.

Can you give some color on your mindset related to the buybacks.

Yeah.

It's interesting.

Given given the.

Our view on the strength of our prospective future earnings and.

This continued growth in our tangible book value you know, we're having to adjust the target number up quite a bit in terms of where we see value in buying our shares back and all of this is continually sharing with me.

That target increase and so I'm I'm going to tell your buybacks are not off the table.

And we would certainly to the extent that we are fortunate enough to engage in call. It some fill in M&A.

Over the course of this year that it might very well be done in conjunction with some buyback.

We've built this fortress level of capital.

And.

The good news is while maintaining this very high level of capital we've been able to still deliver attractive returns on tangible common equity, but it also gives us the optionality to look more seriously at buybacks at this point and frankly continue to pursue the right.

Merger partners.

Levi.

Probably went beyond your question, there, but I hope that helps.

Yeah, absolutely I appreciate it that's it for me I'll step back thank you.

Your next question comes from Kelly Motta with K B W. Your line is open Hi, Kelly.

<unk>.

Hey, Tim all of this and Rick Thanks for the question.

I think I'll continue on enrolling with the M&A topic that'd be left off on I'm, just wondering it seems like the M&A.

For stations have picked up quite a bad debt.

But things have gotten a little bit more debt.

Certain economically just wondering if there's kind of any change in the outlook now versus the last quarter.

And kind of your you know Robyn.

Do you on the pulse of the M&A market as we looked at 2021 I'll share with you.

Our investors.

The posture.

Position I've I've been sharing with our board and I believe it's appropriate at this point to be looking at.

Acquisitions really on two fronts in the first I would describe as is.

Market current market opportunities.

Where the synergies just make all the sense in the world probably more than that billion dollar range.

But where we know we could create through partnerships.

Great value for for those institutions, and certainly create great value for <unk>.

Our investors and so you know.

Those may sound, a bit more tactical, but extraordinarily important and we've had a fine a history of being able to deliver strong returns.

For everybody involved out of out of those kind of actions. The other I would describe as more transformational and thats, where we are.

Look at opportunities that would meaningfully.

Significantly improve.

Our profitability and opportunities to leverage greater scale.

And.

And frankly, there is even a third we've talked about we continue to look at some really interesting opportunities.

To leverage some of our capital into the digital space and and that's both in the payments arena in the security Arena, leveraging our very strong Treasury management capabilities and that's something that we'll continue to work on as part of our strategic vision. So so.

I would say market operative market opportunities transformational opportunities and then investment in opportunities to really define redefine parts of our business in the digital space.

Great.

That's great color. Thanks pen.

Turning to expenses.

In the past.

You've given kind of the expenses related to mortgage during the quarter I know they had been running with a better efficiency ratio because of higher gain on sale of the past couple of quarters just.

Wondering what.

<unk> contribution was in mortgage this quarter to kind of back out the <unk>.

Core bank versus mortgage operations, Yeah, I'll turn it to all of this for the detailed answer to that question, but I do want to compliment you on I noticed in your first look you you picked up on what's happening with our focus on operating leverage and and.

What I'm most excited about is once all this answers the question around stripping out that kind of mortgage run rate is what we're doing in our core run rate and you know I want to point out that we debt.

A lot of the attribution for that reduction in cash.

Core run rate.

As always talked about as being related to the banking center consolidation on that note I would say whats really exciting is that our digital conversion rate and that process is stronger than we expected and more importantly, our retention rates are.

Clients in that consolidation process.

Has all run even our highest expectations, but here's the real point there, while we tend to attribute a lot of that expense savings to the consolidations I have to give my teammates across the entire company credit because we're looking at opportunities every day.

Day to improve all of our processes throughout.

Throughout the bank.

To bring ex core expenses down and our teams have done a great job there and continue to look at opportunities to be more efficient. So so I'm going to take your question as an opportunity to thank my team for their focus on productivity and just make the point that we're going to continue to see efficiency gains.

Coming out of more than the banking center consolidations now all of this you can you can finally answered <unk> question.

Thanks, Kelly and good morning.

Actually for.

Tim's point in our guidance of 182 to $1 92.

Bedded in there in terms of the core efficiency is about $8 million improvement in the run rate from 2020 into 2021 debt kind of strip solid debt all of the mortgage gains mortgage commissions in there now specifically to your to your question.

You're right.

It has been running at.

Efficiency is better that's better than long term averages that we've seen in the industry has seen.

The fourth quarter is typically it is around in our mortgage business salaries and benefits.

Embedded in there is some mortgage commission around 35 to call it 40% in the fourth quarter. It was around 30%. So it gives you a bit of a guidance in terms of how efficient that business has been.

Okay.

That's.

That's really helpful.

Thanks, Thanks, a lot I'll step back now and I'm, sorry, I just want to correct. One thing in terms of the percentage that I gave that percentage the gain on sale until the.

Commissions as a percentage of cash gain on sale not percentage to Sal.

Salaries and benefits.

Got it thanks.

Thank you Kelly.

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

Good morning, Andrew.

Hey, its actually Michael Hultquist on for Andrew Michael.

Kind of following up on expenses Youre looking into this quarter, how much should that line item rise due to seasonal higher payroll taxes and bonus accruals.

Yes.

It shouldn't.

<unk> it all on bonus accruals I mean, right I mean, we'd be accruing for for 2020 bonus has been accrued fully in 2020. So there is no increase on that there is a payroll impact certainly in the first quarter.

That is somewhat Saturday, and I hesitated, but somewhat offset by fewer fewer days business days in the quarter. So.

I would say there is not necessarily a meaningful impact or difference between the quarters from from.

Bonus order book hardwood payroll impact.

Mhm, Okay. That's helpful.

And then switching gears here.

Liquidity is certainly going to be the wildcard.

As with many of the peers, but have.

Have you seen any deposit trends so far this quarter that would suggest.

Less excess liquidity going forward and maybe continued margin expansion.

No no I think.

Encouragingly, we've seen quite the opposite deposits of.

We continue to build them.

I'll I'll view that does deposit positive and building our core franchise.

Building debt liquidity it just pre funds debt loan growth that we've talked about 10 billion that becomes very accretive to both margin and net interest income.

Yeah.

The loans have been pre funded.

Not only growing but growing while we've.

Eliminating a number of interest bearing deposit products seem very solid retention in our core operating accounts and seen great traction.

This isn't talked about enough seeing tremendous traction in our Treasury management arena and the growth with business relationships.

And seen a lot of that business come from larger institutions and thats.

A trend that we're really excited about.

Okay. That's terrific. Thank you for taking my questions I'll step back of course, Michael Thank you.

And your next question comes from Kelly Motta with VW. Your line is open.

Kelly.

Hey, sorry to hammer listing expense question, but just want.

I want to make sure I got the moving parts for my model right.

Seven banking center consolidations that you have upcoming.

How should we be thinking about it.

Kind of the cadence of those expense.

It's coming in.

What will they be completed.

Right so yeah.

Yeah.

We don't expect it to get.

Get it completed until the end of the second quarter, so really that.

$2.2 million expense save Debbie.

In the press release on consolidation is expected to take place in the second half of this year.

Important plus got it yes, no. Thank you for asking and that's an important clarification.

And then and then just a minor housekeeping thing just with on the tax rate is this kind of like 18, 19% a good.

Approximation for next year.

It is it is okay. Thank.

Bank cap.

Thank you I am showing we have no further questions at this time I will now turn the call back to Mr. Laney for his closing remarks, alright. Thank you Mary I'll just thank everyone for joining.

Hope everyone continues to stay safe and we appreciate your support take care.

And this concludes today's conference call, if you'd like to listen to the telephone replay of this call. It will be available beginning in approximately two hours and will run through February 4th 2021 by dialing 850, 58592, 056 or four zero for.

373 for zero sex and referencing the conference I'd of for four seven Q2, six for 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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Yes.

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Okay.

Yes.

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