Q3 2021 National Bank Holdings Corp Earnings Call
Good morning, everyone and welcome.
National Bank Holdings Corporation, 2021 third quarter earnings call. My name is Nick and I will be your conference operator for today.
At this time all participant lines 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 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.
<unk> 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 holding 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 reconciliations.
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 and National Bank Holdings Dotcom.
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 Nick good morning, and thanks for joining National Bank Holdings third quarter 2021 earnings call I'm joined by our Chief Financial Officer oldest burkins.
Our focus.
<unk> gained share in attractive markets is translating into strong top and bottom line results.
I believe the quality of our new business pipeline will translate into attractive results through the fourth quarter and into 2022.
I am very proud of our bankers engagement with our.
Our small and medium sized business clients and prospects and I view. This work is a differentiating driver of the momentum we're building in our business. We continue to be prudent in our underwriting of credit risk and we feel very good about the health of our loan portfolio.
That point I'll turn the call over to all of.
Just to cover the quarter in more detail Aldis alright. Thank you Tim and good morning, everyone. Thank you for joining our earnings call this quarter.
I'm pleased to report their third quarter earnings of $19 8 million or <unk> 64 per diluted share.
This quarter was highlighted by record loan originations and exceptionally clean credit.
Book and capital deployment through an investment in Fitzgerald Global holdings, as well as stock purchases.
During the quarter. We also thought will improve the company's balance sheet through the sale of the majority of our mortgage servicing rights.
I will cover these items in more detail later, but first let's address our loan growth.
Third quarter's loan fundings were a record $413 3 million as a result, we grew our core loan book during the quarter, a solid 16, 5% annualized.
The loan growth was broad based with all asset classes and geographies contributing to the loan balance growth.
Tomorrow.
Continue to be very pleased.
With our bankers bankers business development efforts, which are generating strong pipelines across all of our markets.
At this time, we project a project to exceed our original guidance for loan growth from the prior quarter unexpected near double digit annualized growth for the fourth quarter of 2021 again.
With regard.
Adjusted the Paycheck protection program loans, we had $76 $8 million outstanding as of September 32021.
The remaining PPP loan deferred revenue balance is $2 $4 million and we expect most of this fee to be recognized in the fourth quarter of the forgiveness efforts can continue.
Turning to deposits.
This quarter, we continued the strong growth in deposits with average transaction deposits, increasing five 2% annualized.
Our cost of total deposits decreased another three basis points this quarter to a low 21 basis points.
Strong deposit growth benefited our average, earning asset base, which similarly grew $62 5 million.
And as we discussed during the last earnings call. We have started deploying cash into higher yielding loan balances.
The resulting fully taxable equivalent net interest margin during the third quarter expanded 11 basis points to 293% and.
And the excess liquidity is still had a 36 basis point dilutive.
On our margin.
This quarter's fully taxable equivalent net interest income was $48 $9 million and included $2 $6 million of PPP loan fees.
Stripping out the PPP loan fees are linked quarter core net interest income grew 19, 8% annualized.
Our asset quality.
<unk> remained strong with another quarter of solid reductions in nonperforming loans and nonperforming assets.
<unk> decreased nine 6% this quarter in our 27% lower than one year ago net charge offs for the quarter were just two basis points annualized.
These excellent credit trends combined with improving economic forecast projections.
<unk> from Moody's resulted in a reduced calculated reserve and was sufficient to support the new loan growth and therefore required no provision expense this quarter.
The resulting ACL to total loans, excluding PPP was 113% at quarter end.
Total third quarters noninterest income was $28.
$5 million, our client engagement for both consumer spending and business account activity continued to expand with.
With total service charges, reflecting five 5% growth this quarter over the third quarter of last year in bankcard fee revenue increased 12, 2% over last year's third quarter.
We also continue to exit.
Our banking center efficiency initiatives.
All that in a sale of an additional banking center during the quarter.
As a result, other noninterest income benefited from an 800000 dollar deposit premium gains this quarter.
Additionally, this quarter, we sold approximately one $3 billion of our mortgage servicing portfolio.
But the high mortgage production volumes. This portfolio has more than tripled since the beginning of the pandemic and this was a strategic move to reduce the mortgage servicing has addressed.
As a result of this sale, we reduced our intangible assets by approximately $11 million in realized at $1.3 million gain.
The other.
<unk> the number this quarter for this quarter was better mortgage revenue, whether the margin recovery as compared to the second quarter of 2021.
For the remainder of the year, we project our total noninterest income to be in the range of $19 million to $21 million.
As always large swings in long term interest rates could impact both on mortgage production.
Key driver in this projection.
Turning to expenses this quarter's noninterest expense totaled $51 3 million and was elevated due to a couple of nonrecurring items.
During the quarter, we incurred $2 $4 million in transaction related expenses for defense joint investment.
Well as an eight.
<unk> $800000 write down on one Oreo property related to a prior bank acquisition.
For the fourth quarter, we expect noninterest expense to return to the range of 45 to $46 $5 million consistent with our quarter on the rate.
With regards to capital this quarter, we invested.
$120 million in fence drove global holdings.
Part of our previously announced strategic partnership.
This investment resulted in BH owning a 33% noncontrolling interest in the company.
Additionally, during the quarter of either purchased $19 $4 million of our stock as it is.
<unk> of the stock buyback.
Bested activity the fully diluted share count for the fourth quarters for the fourth quarter is projected to decrease to around 38 million shares.
Our capital ratios continued to remain strong at 10, 43% tier one leverage ratio in 2014, 57% common equity tier one ratio and.
And finally despite.
Buyback buyback activity, our tangible book value per share increased 19 cents this quarter to $24 20.
And with that I will turn it back to you. Thank you all of this.
I want to thank all of our teammates for their contribution to our strong third quarter on our last earnings call. I said I believe we were poised to deliver record.
<unk> of new relationship growth and loan production and our team delivered.
As we look ahead, we feel very good about the high level of business activity in our markets and our company's potential for future growth.
Speaking of future growth, we believe we're on the verge of creating a comprehensive.
Digital financial ecosystem capable of providing small and medium sized businesses with unparalleled access to a full range of banking services and block chain payment alternatives.
We're building a digital marketplace of financial services within the bank regulatory.
Same work that we believe can be a game changer for small and medium sized businesses across the country.
You can be certain that we will be sharing more along the way.
On that point, Nick let's open up the line for questions.
Thank you if you would like to ask a question. Please signal by pressing star one on.
<unk> phone keypad.
If you're using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal.
And our first question comes from Brett Rabbit in with Harmony.
Degroup. Please go ahead.
Hey, good morning, everyone, Hey, good morning, good morning.
Wanted to first ask on Tim on your on your last point about the ecosystem and.
In the Fintech space can you maybe give us if possible any thoughts on on revenue and you know how you see.
And you're telling out.
Either in the near term or over a multiyear period and it is it is it more creating an ecosystem to add new clients or do you expect this to be more of a banking as a service platform that is driving specific fee revenues in particular.
Yes.
At that point I'll begin with the last question you touched on there to be clear we are not.
Looking at playing in the banking as the as a service arena I mean, there could be one off elements, where we're doing that on an experimental basis, but ultimately our view is that.
Banking as a service play will be Commoditized stand where on the other hand very focused on the development of comprehensive relationships with small and medium sized business operators and to be.
Even more clear we believe across this country.
There is opportunity.
Two.
Engaged with with minority groups to engage with a broad range of small business owners in particular in a way that will give them access to the business or the bank regulated system that they have not experienced to date.
So I would tell you as we talk about this ecosystem, we think about it not necessarily on a proprietary basis, we think about it again more as a market place, where we'll be working with best in class partners to deliver through this ecosystem of full range of.
In services and so if you really think about it.
The way, we think about it there are four legs to that business. The first is obviously digital lending capabilities and we tend to think about those lending capabilities and three arenas addressing trade finance, our working capital needs and Thats.
The key role that that fence drove will play and again, we're fortunate to have been able to partner with with Vince drove who had a proven track record in Australia and they brought their company to the United States I suspect, we will be working to deliver SBA related products to address.
Commercial real estate owner occupied commercial real estate, where small business owners medium sized business owners want to own.
And invest in their factories and their business places.
And then we'll be talking about the addition to.
Digital equipment finance and other capabilities that basically start to check the boxes around the primary needs of small and medium sized business owners. The second leg relates to depository and Treasury management services, we think a real differentiator between non bank players and.
And doing this within the regulatory framework is obviously the ability to deliver these services on an FDIC insured basis, which we think is huge the third leg is about delivering comprehensive information dashboards. When we think about real problems to be solved one for many business.
That don't have the benefit of having a CFO or a finance office is that ability to understand where they are on a cash flow basis on a day to day basis, and we believe we're working with the right partners to deliver that kind of information in this ecosystem to these businesses.
<unk> and reduce anxiety in these business operators lives and really the fourth leg is about leveraging block chain to reduce cost of payments, while improving the quality of information related to those payments.
I'm not going to go much deeper that maybe even more.
As expected, but if I put those four legs together and think about where this can take us on a on a literally coast to coast basis.
I think it's premature to be talking about incremental earnings for the first quarter of 2022, having said that I believe there will.
And then you elements of this ecosystem that will begin to deliver incremental profitability next year.
That's that's very helpful.
A lot of a lot of detail and it was.
There are really interesting.
Dynamic that you've got.
I guess the the other big question I wanted to ask was just around.
Loan growth dynamic versus the margin and I'm just curious it would seem like if you can continue this growth.
And deploy liquidity.
Liquidity to fund loan growth the margin.
B keep going up so honestly.
Was curious if it would.
<unk>.
Do you like the margin can continue to have an upward.
And then I just wanted to ask him on the loan growth side.
Is this a lot of new clients driving this growth or is it more in existing clients.
<unk> drawing on lines of credit.
Yes, Brett.
I'll take the margin first deals so you're absolutely right.
Deploy the cash into loans that will only will be accretive to the margin. One one item that is benefiting all of the banks. These days, notwithstanding which is the PPP loan fees. So if you take that out.
<unk>.
On linked quarter basis, we grew 2.2 million almost 20% annualized in terms of.
Net interest income and that is driving the margin expansion, but again, the PPP loan fees.
As a short lift the benefits, which we obviously take but.
B not counting on so.
So you need to adjust for that in that calculation, but the.
Out margin is absolutely expanding.
On the.
On the long growth prospects look I could not be more proud of our teams.
And their engagement with both existing clients and prospects.
Tend to fall in that camp of people, who believe that you may be able.
Core maintain relationships.
Over the telephone and.
Assume and other capabilities, but it's difficult to develop new relationships without being face to face we've been back in our offices since July of last year of course, our front line banking center.
To me.
Teammates never left their offices.
But I think the fact that we have our business banking and commercial banking.
Officers out in the marketplace engaging with with business operators has has.
And a real game changer for us and again I'll remind you that we were seeing the new prospective business in the pipeline as we move through the first half of this year, we're really watching.
The business in the balance sheets of those businesses through the first quarter as they begin to deliver their annual balance sheets.
Ben Toms statements to ensure that we liked what we were seeing and that the business has it resumed.
Operations Accordingly.
We've had great success in winning new relationships and is also suggested in my earlier comments, we feel very good about the pipeline as we.
Turning to the fourth quarter and into 'twenty two.
Okay. That's.
That's very helpful. Thanks for all the color congrats on the on the results.
Thank you.
And our next question comes from Andrew Liesch with Piper Sandler. Please go ahead.
Look.
Andrew Your line is now live perhaps you're muted on your end.
Oh, sorry about that I apologize I don't know what happened.
Thank you for the detail on the Fintech.
Fintech partnerships very helpful.
Just a couple of questions here.
And here on the guidance on the non interest income.
The mortgage banking premium increased but if you expect it to.
The total non interest income line to drop this quarter is that just from lower lower volume here in the slower months.
That's right. So if you're within that is certainly.
One question I'll slow down to be expected this quarter to take place in the fourth quarter as it typically does in the winter months.
So that's embedded in that in mortgage guidance also this quarter.
Just to repeat we did benefit from the $800000 benefit from deposit premium on the sale of the banking center.
So that obviously is not appear.
Certainly sir so if you're looking at the linked quarter basis Thats the guidance.
Right got it.
Then.
On the.
Loan yields just curious on the new production, where those were being added relative to.
The core portfolio yield excluding the PPP.
To beat them.
Right. So if you look at.
Our NIM table and look at the first line, which is originated loan FTE.
401% that include that includes the benefit of the PPP, if you exclude exclude that.
Originated loans are yielding about 387%.
<unk> last quarter, which is fairly flat to the prior quarter and our new loan originations came on at three 9% so at or slightly accretive to the originated book because it exists.
Got it.
With a lot of the growth being C&I or the variable rate loans.
It's a lot of.
<unk> I'd say, it's about 50 50 type of mix between variable to fixed rate.
Gotcha.
Oh excuse me one more question related to the mortgage business and expenses.
The easy.
Parse out how much of that.
Salaries and benefits line was related to the uptick in mortgage banking.
The Bareboat Avenue in the third quarter.
Yes, well I'm not going to give you exact answer but I'll give you the guidepost that tips.
Typically talk to so if you take the gain a gain on sale. This.
This quarter back out the $1 3 million.
NSO ourselves benefit and then about 30% to 35% of the domain and gain on sale is unusually hot commissioning.
And variable type of cost associated with mortgage.
Got it.
Hey, Andrew I would add on to that last question I think it's an important one is that I give our residential banking team leadership and all of this and his team a lot of credit for being very focused.
Rami on bringing those variable expenses down as we see as we see revenue coming down in the mortgage banking business and.
It's one thing to understand help commission should naturally come down as as closings go down.
The real art.
Is bringing those other variable expenses down and they've just done a remarkable job.
Of managing those expenses Accordingly, and you should expect that to continue.
Okay got it.
Very helpful. Thank you for taking the question I'll step back here.
You bet.
Thank you and our next question comes from Kelly Motta.
Mato with MPW. Please go ahead.
Hi, Thanks for the question.
Thanks, Tim for all the color on the syntax Theres a lot more in there than I thought there wouldn't I'm definitely going to have to go back to the transcripts for a second read them.
Yeah.
I wanted to ask a bit about deposits.
Rolled off the time deposits and kind of that balance increase balance sheet leverage has helped them.
Port.
Some NIM expansion just wondering.
How we should be thinking about the trajectory of deposits and if there's more kind of higher cost.
Types of accounts that are left to be rolled off.
Just kind of expect an inflection in growth here and that maybe next quarter.
Any any thoughts on that would be helpful.
Yeah.
To be laser focused on.
Adding relationships and operating accounts so.
The primary driver for us as we as the man.
Manage internally strategically our deposit growth.
Naturally some of that where there are higher priced time deposits that might be in the one off that Dod rolling off from from both years ago coming off and being just not chase.
That rate.
Resulting in some of the time deposit book decreasing.
But for US, it's really building and expanding the relationship base behind it.
In terms of your question, where does that lead to the cost of funds or cost of deposits.
We ended the quarter at 21 basis points total deposit cost I believe we can get.
<unk> they'll 20 by end of the year as condition to remix continues.
Thank you and then if I if I could slip one in on capital you were buying back stock. This quarter just wondering on thoughts for continued opportunistic buybacks and we got color too just.
Get the loading on capital on some of the Fintech investments that you had.
Had alluded to in past quarters, just wondering.
Any updated thoughts on capital deployment, given you still have quite.
Quite a bit of flexibility.
Where you are right now thanks.
Thank you.
You hit on.
To the right.
Mindset, there, which is we are first and foremost going to be opportunistic and we do think the flexibility we have.
Enables us to really continue to look at our options.
We when we think about the.
Investments in both thin strut global holdings, an figure technologies.
It was really about.
Our belief that these two partners represented key pieces to.
To this puzzle, we're putting together to create.
The ecosystem and I will share with you that this business will be known as to unify and more to come on that but so as a reference to unify that as the ecosystem business. We're building you can expect.
Other partners that represent.
The key pieces of this puzzle.
Two to become a part of this where opportunities to invest we will do so because we believe in the upside of what we're doing here, we believe in the upside in these partnerships and <unk>.
And so.
Other probably see us less focused on call it the <unk>.
Investment in <unk>.
The smaller community bank and more focused on what we believe is the future having said that we will maintain optionality and should we actually discover.
The right opportunity in the coming months in the traditional bank space, we will do that.
But we are in ongoing discussions with a lot of very smart people and partners that we think could be key and taking to unify.
From coast to coast, and creating again unparalleled access for small and medium sized business. So.
Again, I think you hit the nail on the head we will be opportunistic and we'll maintain optionality.
Great. Thank you so much very helpful. You bet.
Thank you and our next.
<unk> comes from Andrew <unk> with Stephens. Please go ahead.
Hey, good morning.
Hey, good morning, good morning.
And maybe back on the margin really quickly. It was good to see you leverage some of the liquidity this quarter.
I guess with that the cash position, so I think around $7 million to $800 million.
I know the growth outlook feels like it's improved but is it fair to think that you would still kind of build the securities portfolio from here or any kind of update on strategy there.
Yeah on the investment Securities portfolio, we added.
Maybe $100 million on linked quarter basis, I think it is were.
I'd like it to be unless some outlooks for loan growth or something else changes for now we'd like to preserve the optionality on the balance sheet as well.
Not lock into a long duration or other type of high risk asset.
And just keep the cash and deployed into loans.
Yeah.
Yeah understood.
It looks like with the Zip.
Zero provision taken this quarter as well as just the strong balance sheet growth Youre fairly youre back I guess fairly close to day, one seasonal levels I guess moving forward should we expect the provision line to more closely match charge offs.
Our reserve for new loan growth.
Or do you think theres room for the allowance ratio to move move further down from here.
Paul.
Today, we are fully reserved as as the current conditions would indicate in the tariff for the total book. So it is hard to predict where it will depend on where the alpha goes and where.
The credit trends certainly we always will have to cover the.
New loan growth as well as.
If there is any deterioration in the credit book, but right now I'm just not.
There are to predict where this may go from here.
Because of the Moody's Moody's projections.
Diving this quite a bit and if you look at the some of those forecast today.
Some of them are indicating getting back to near 3% unemployment rate in not too distant future and.
Hum.
So a little step back from there could drive the model change.
Okay.
It's good color I appreciate it.
Alright, Thanks for taking my questions and Tim I appreciate the color on.
The ecosystem and the partnerships.
You bet, but have a good day.
Thank you and our next question comes from Jeff <unk> with D. A Davidson. Please go ahead.
Thanks, Good morning.
Tim and Aldis Hi, Jeff.
Sure.
Yeah, just really just a follow up on a few of those topics the first being on the Fintech.
And ships.
Not to simplify but if we're looking for kind of ROI on that investment that's maybe the wrong way to look at.
In the near term, it's kind of staying relevant or being a leader in the business on a cost of doing business in.
And maybe those revenue synergies occur down the road as you know.
As we get into that partnership.
<unk> is that.
You had kind of largely.
Invitations in the in the short run here.
I think thats.
Reasonable.
Summary.
I think a bit companies like Amazon when they started and they didn't have the benefit of having a core engine.
Like we have to continue to drive revenue.
And profitability and we certainly believe our core bank.
Has the tremendous amount of upside and runway and we will not be taking our eyes off FID on the other hand.
I get just as excited about the <unk>.
Prospects.
And to unify as I did when we launched NBA. Some 11 years ago, and there were naysayers, who were saying it couldn't be done I think the way we think about the technology as you know we will.
We will strive with great discipline.
To avoid being drawn to the bright shiny objects and investing in technology just for the sake of.
Of of play.
Playing in that space. This is really about looking at problems.
That exists for small and medium sized business operators in this country.
For Te and believing we can use the tools many of them happen to be technology.
But we can use tools put together.
Business that can solve those problems coast to coast and I think what's really also interesting about this is.
We think versus.
Thinking about this this business.
<unk> model and waiting for it to come together over a five year period or something like that the architecture is such that we believe that there can be incremental contribution to earnings.
<unk> beginning as early as next year and that doesn't mean that the entire business model will be up and running but there will be incremental elements of the model that will already be taking to the market and benefiting from.
Okay I appreciate it aldis.
Did I Miss a margin.
Margin guide or IBM.
In your prepared remarks did you did you mentioned where you think.
Core margin as you said it.
No I did not specifically on the percentage terms, but really to kind of come back to driving impacts to the margin today that are.
Non dilutive one accretive.
Net.
The P. P P along phase $2.6 million this quarter as well as the excess cash and earning asset base. The unloading the earning asset yield. So if you back those out the core margin is currently around $3 15 to $3 20 type of percent.
Margin.
In.
Right.
To build on that.
Got it thanks.
Then.
Back to the loan growth.
And expectations sort of uptick in the obviously in the third quarter and then as Youre guiding for fourth quarter I wanted to kind of ask that a different way is it.
You think that's a little bit of a pent up catch up to where you are.
Wrong second half, but then we enter 'twenty, two and and you're back to sort of more normalized or or is that like this uptick is sustainable.
Do you really feel good about me.
Maybe a high single digit sort of path.
And in 'twenty, two and I don't mean to front run.
The forecast there, but just a.
Is this catch up in the second half or is it real emergence of.
The growth that could carry into the new year, sorry long winded.
No. It's an important question and I would just ask.
Pass it back and read the transcripts at year end at the end of first quarter at the end of second quarter.
We did talk about the fact that we had our foot our feet on the brakes are certainly coming into 'twenty, one and waiting until the end of the first quarter and until we receive the financial information from those processes.
SKU gifts and clients, we started to lean in in the second quarter, we've seen the benefit from a hyper focus on market development on business development in each of our respective markets and I believe that hyper focus and engagement as I said in my prepared remarks, we will.
Prosper carry us strongly into 2022.
We are very energized around what we're seeing in our markets and again were fortunate to be operating in some of the better markets in the United States, but make no mistake.
Couldn't appreciate our bankers.
Well for their level of engagement and it's making a difference.
Thanks, I have one more I'm sorry, the mortgage.
Just a quick one just.
'twenty two is it safe to assume sort of MBA forecast score for 'twenty two versus 21.
More of them would you expect to largely mirror that.
I think.
The answer is yes.
Our starting point now you'll have to come back and look at the again back to Tim's comment of that'd be our operating in markets that are growing.
Going faster and certainly Colorado, Utah.
Texas markets.
So demographically greater population inflow than some other parts of the country. So we benefited from that one and secondly.
The other component of the biopsy.
Our volumes. These days are back to 60 call it 65% purchase market, So which is all driving core behind that mortgage business as well so.
<unk>.
NBA outlooks on that is important to incorporate as well.
Yeah.
Thank you Bob.
Good.
Thank you and I'm showing we have no further questions. At this time I will now turn the call back to Mr. Laney for his closing remarks, alright, Thank you, Nick and I want to thank.
Everyone, who attended this morning for your time and attention.
Particularly thank those who are investors and National Bank Holdings, we continue to be focused on creating strong total shareholder returns and our commitment is to do everything that is prudent to continue a track record of delivering.
Offering solid results.
Thanks and have a good day.
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 four hours and will run through October 25, 2021 by dialing 8882031112 and referencing.
Pathos 757777 for.
The earnings release and 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.
[music].