National Bank Holdings' (NBHC) CEO Timothy Laney on Q3 2016 Results - Earnings Call Transcript

| About: NBH Holdings (NBHC)

National Bank Holdings Corporation (NYSE:NBHC)

Q3 2016 Earnings Conference Call

October 21, 2016 11:00 a.m. ET

Executives

Timothy Laney - Chairman, President and Chief Executive Officer

Richard Newfield Jr. - Chief Risk Officer

Brian Lilly - Chief Financial Officer, Chief of M&A and Strategy

Analysts

Brian Zabora - Hovde Group

Gary Tenner - D.A. Davidson

Matt Olney - Stephens Inc.

Chris McGratty - KBW

Kelly Mata - Keefe, Bruyette & Woods

Tim O'Brien - Sandler O'Neil

Operator

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2016 Third Quarter Earnings Call. My name is Kelly 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 presentation. 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 statements regarding the Company's loans and loan growth, deposits, strategic capital, potential income streams, gross margins, taxes, and non-interest expense. 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.

It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman, President and CEO, Mr. Tim Laney.

Timothy Laney

Thank you, Kelley, and good morning and thank you for joining National Bank Holdings' third quarter earnings call. I have with me, of course, our Chief Financial Officer, Brian Lilly, and Rick Newfield, our Chief Risk Officer.

I am pleased to report that during the third quarter we delivered another quarter of record earnings driven by solid revenue growth, expense control and excellent credit quality outside of the energy portfolio. With loan originations of $282 million, we achieved a key milestone of $1 billion of new loan originations over the last twelve months and more important, we continue to gain momentum in our markets. Our focus on strong expense management resulted in a year-over-year third quarter reduction of 14%. And with actions taken in the quarter, we believe our energy portfolio which now represents only 3% of our total loan exposure is well covered. More important, the credit quality of our remaining originated loan portfolio remains nothing less than excellent.

I will now turn the call over to Rick Newfield to cover our credit metrics in more detail.

Richard Newfield Jr.

Thank you, Tim, and good morning everyone.

Let me start by discussing overall credit metrics and trends during the third quarter. Including energy loans, the ratio of classified loans to total non 310-30 loans improved from 2.3% at June 30, 2016 to 1.7% at September 30, 2016. Excluding energy loans, the classified loan level remained low with the ratio of classified loans to non 310-30 loans decreasing slightly from 1.25% as of June 30, 2016 to 1.24% as of September 30, 2016.

Total non 310-30 non-accrual loans decreased during the quarter from 1.46% at June 30, 2016 to 0.84% with the decrease primarily driven by the charge-off of loans reserved for in previous quarters. Excluding energy loans, non-accruals continued to decrease, improving from 0.47% of non-310-30 loans at June 30, 2016 to 0.36%.

For the third quarter net charge-offs were driven by losses recognized on two energy loans and were 2.64% annualized. Outside of energy, and one C&I loan that had been fully reserved for in prior quarters, net charge-offs for the quarter were an excellent 3 basis points annualized.

For the first nine months of 2016, annualized net charge-offs were 1.16%. However excluding energy, net charge-offs were just 13 basis points annualized. As Tim pointed out earlier, it's important to note that the 97% of our loan portfolio outside of energy continues to exhibit excellent performance.

Now let me turn to our energy loan portfolio. As a whole, energy sector loans were $86.6 million as of September 30, 2016 and represent only 3.1% of total loans, only 2% of earning assets and only 18.3% of our company's risk based capital. These balances are down 17.2% from June 30, 2016.

Our energy portfolio is composed of performing loans of $73.3 million and four non-accrual loans with $13.3 million in balances. The net additional energy provision expense taken during the quarter was $3.9 million as compared to $10.7 million in the first quarter and $4.3 million in the second quarter. $3.5 million of this provision related to further incurred loss on our midstream sector non-accrual which I've discussed during last quarter's earnings call. This loan is now written down to orderly disposition value as resolution strategies have been delayed and our action is consistent with the fall Shared National Credit [exam] [ph] findings.

The total reserve on energy loans was 4.2% at September 30, 2016. This is down from 14.8% as of June 30, 2016 because the majority of energy charge-offs taken were against reserves set aside in prior quarters. We continue to review and conduct stress testing of each energy client monthly. Overall we saw the performing portion of our energy portfolio as stable to improving during the quarter.

While uncertainty remains as to global oil and gas market conditions, we believe we’re adequately reserved and well positioned as of quarter end.

With respect to the fourth quarter of 2016, provision expenses will cover our expected loan growth at about 1% of net growth as well as expecting minimal charge-offs ranging from 10 to 15 basis points on an annualized basis. We delivered another strong quarter of loan originations hitting $1 billion on a trailing twelve month basis. Commercial loans represented 42% of the originations. Commercial real estate was 19% and consumer, principally single family residential loans, was 39%.

Metrics relative to granularity and quality remained consistent with prior quarters. We continue to maintain discipline relative to our self-imposed concentration limits across industry sector and real estate property type. For example, non-owner occupied commercial real estate is only 19% of our total loan portfolio and no individual property type exceeds 4% of total loans.

I will now turn the call over to Brian.

Brian Lilly

Thank you, Rick, and good morning everyone. As you saw in yesterday's release, we delivered a strong $0.30 earnings per share with return on tangible assets of 80 basis points. In addition to solid organic trends with loans, non-energy credit quality and expense control that I would cover shortly, we realized approximately $6.5 million in gains primarily related to collection efforts on the acquired problem loans and OREO portfolio. We're very proud of our talented workout team as they continue to create value from the problem assets that we acquired several years ago.

These gains more than offset the $3.9 million additional provision for loan losses that we recorded against energy sector loans and we took a substantial step in cleaning up the energy sector problem loans through charge-offs. Adjusting for these items, we see the run rate in the low $0.20 range. I will add that we will continue to realize gains on acquired problem loans and OREO over time just that the timing is less predictable. As Tim and Rick mentioned it is exciting to deliver on our goal of $1 billion loan originations over the last twelve months, especially as we stay disciplined with our credit policy regarding industry concentrations and credit exposure size among others.

The quarter's originations of $282 million drove a 12.2% annualized increase in total loans and an 18% annualized increase in just the originated loan outstandings, the new originations coupon rate was 3.6% with over 50% variable rate. Higher than forecasted loan pay-offs and pay-downs, plus the charge-offs lowered the growth rate this quarter by approximately $16 million or about 9 percentage points to the annual growth rates that I just mentioned.

The new business pipelines remain strong as we look to complete 2016 with over $1 billion in originations. Through the first nine months, we have grown the total loan portfolio a non annualized 9.1%. The growth rate has been impacted by the reductions in the energy portfolio of $61 million this year and the third quarter’s higher than forecasted payoffs and paydowns. As a result, we are adjusting the full year growth guidance to 12% to 15%.

Turning to deposits, we covered the highlights in yesterday's release. I would add that over the past twelve months we have consolidated 12 banking centers or 12% of our franchise and continue to be very pleased with our client retention, especially in comparison to the expense savings.

In terms of earning assets, we continue to fund the loan growth with cash flow from the investment portfolio and acquired problem loan paydowns in addition to deposit growth. As a result, we are forecasting earning assets to end the year in the range of $4.2 billion to $4.4 billion.

Fully taxable equivalent net interest income totaled $38.1 million, and increased $2.3 million from the last quarter. In addition to the growth driven by new loan originations we did realize $1.8 million in accelerated accretion on the 310-30 portfolio. The net interest margin of 3.59% benefited approximately 20 basis points from the accelerated 310-30 income and some large prepayment fees.

Looking forward we are forecasting quarterly fully taxable equivalent net interest income in the range of $35 million to $37 million as we replace the very high yielding 310-30 loans and lower yield investment portfolio with new loan fundings. The resulting net interest margin is expected to be in the range of 3.35% to 3.45% for the fourth quarter.

As further guidance detail, we are forecasting 310-30 accretion income of approximately $6 million to $6.3 million in the fourth quarter with resulting yield of approximately 16%. As usual these estimates can be higher for accelerated accretion income and lower for changes in the estimated future cash flows and timing thereof, resulting from a quarterly re-measurement process.

Rick did an excellent job addressing credit quality and please refer to his comments for our 2016 guidance.

Non-interest income totaled $11.6 million and included good linked quarter net growth of 9% annualized when combining the categories of service charges, bank card fees and gains of a sale of mortgages. We also benefited from the collection of $900,000 on FDIC acquired loans that were charged-off prior to acquisition and it's shown in the other non-interest income category of our income statement.

Additionally we collected $1.6 million in a guarantor settlement on one large OREO property. Looking to the fourth quarter after adjusting for expected seasonality and absent any one time pickups we are forecasting total non-interest income in the range of $8.5 million to $9 million.

Non-interest expenses totaled an excellent $33.4 million for the quarter and came in better than our quarterly guidance. Higher than forecasted OREO gains drove a net credit from OREO and problem loan expense of $900,000. For the fourth quarter we reiterate our expense guidance of $34 million to $35 million which does not include any OREO gains in excess of the problem loan expense. This would bring the full year expenses to $136 million to 137 million and would represent a strong decrease from 2015 of approximately $22 million or 14%.

Regarding the fully taxable equivalent tax rate we are expecting the fourth quarter and full year to come in close to 31%. Capital ratios remained strong with $65 million in excess capital using the 9% leverage ratio. Also the remaining buyback authorization was $18.8 million at September 30.

Tim, that concludes my comments.

Timothy Laney

Thank you, Brian. You did a great job covering a lot of ground. Before moving to Q&A, I am pleased to share that our Board of Directors declared a 40% increase in our dividend moving from $0.05 per share to $0.07 per share. It should also be noted that we remained active during the quarter repurchasing 2.6 million shares. Since early 2013 through September 30, 2016 we have now repurchased 50.4% of our shares outstanding at a weighted average price of $20.

And Kelly on that note I'll ask you to open up the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Zabora of Hovde Group.

Brian Zabora

Thanks, good morning. Just a question on the pay-downs, you mentioned an increase. Were there specific categories where you saw higher levels and just any details that you may have?

Timothy Laney

Yes, we did. It was – it’s primarily in our commercial or C&I lending, kind of a -- it was a bump over we've had the first couple of quarters, we've been running in that 140 to 150 and we had $190 million a month in all payoffs and paydowns. So it did jump in that particular category.

Brian Zabora

And then the OREO gains that you had in the quarter, it looks like, if I look at the balance sheet, it looks like OREO declined by about $2 million so you had a pretty nice gain there. Should I look at that as maybe the potential gained content, given you've got about $20 million left or were there maybe some outsized gains and it might repeat going forward?

Richard Newfield Jr.

Brian, this is Rick. What I would say is we have some unique situations where the gains are disproportionately strong relative to the carrying value. So I would caution against extrapolating against the entire $20 million. With that said we do have quite a bit of opportunity that’s still substantial in that portfolio.

Timothy Laney

I would add that we are now viewing our special assets team somewhat as a profit center over the next 18 months, expecting them to realize gains from the remaining acquired OREO as well as opportunities to pick up recoveries from previously charged off loans that were acquired. So well, Brian, your question is a great one and we're not ready to forecast the specific returns or gains in those categories, I think you're going down the right path in terms of thinking about the opportunity there.

Brian Lilly

Brian, let me just add just for clarity from the accounting side. There's really four places that you're seeing in this particular quarter, the third quarter you saw all of them. So it's coming through in accelerated accretions and that’s on loans, it’s coming through on previously charged off loans and that's in our other non-interest income line of our income statement. You see OREO separately up in the non-interest income, that’s a third category and then all the gains the accounting says we have to book it against as a contrary expense down there and that's really the point of your question was the OREO gains is down as the contrary spend so I of wanted to make sure you thought about the other three categories.

Brian Zabora

Lastly, with increasing the share price, thoughts around the pace of buybacks going forward?

Timothy Laney

We’ve given the answer to that anticipated question a lot of attention and I'm simply going to say that we're going to be opportunistic.

Operator

Your next question comes from the line of Gary Tenner of D.A. Davidson & Company.

Gary Tenner

Good morning, guys. Brian actually asked several of my questions, but just to touch base on the yield on the non-310-30 loans, bounced around a little bit last couple of quarters. Anything to that beyond just volatility on prepayment fees and things along those lines?

Timothy Laney

No, let me add to that. It’s been running around that 3.6 for several quarters now and we would certainly like that to be higher. I think as one of the things that shocks us a little bit coming out of last year is when the Fed raised 25 basis points, we saw the competitive marketplace where we do business really just give that away. Of course everybody came up, so they weren’t going to raise the deposit side but then they kept the loan spreads 25 basis points narrower. So we're looking -- we're seeing a little bit of tension in the marketplace on that, so we're looking hopefully to see those rates move a little bit as we go forward. But yes, that's the story behind that.

Gary Tenner

And just one quick question on the fees and your guidance Brian -- the fourth quarter 8.5 to 9. I guess back of the envelope this quarter would be somewhere around a little bit over 9x the cost. So is that sort of a maybe modestly downward trajectory in the fourth quarter just mortgage related seasonality?

Brian Lilly

If you want to look at banking generally I've always seen the third quarter being the strongest for all banks and seasonality does play into the fourth quarter little bit with the number of days. And so you do see interesting enough, you see overdraft currencies come down, you will see bank card fees go up, and typically not offsetting that and mortgages do come down a little bit. So yes.

Operator

Your next question comes from the line of Matt Olney of Stephens Incorporated.

Matt Olney

And I want to start on the energy credits. You've talked about the same small handful of energy credits over last few years. So and obviously you've addressed one in the press release as far as a charge off from the midstream relationship you have. Can you go over the other energy loans that you've been watching closely and remind was there any kind of migration into that bucket from previous quarters? Thanks.

Richard Newfield Jr.

Matt, hi, this is Rick. So a couple of thoughts. First, I mean we did have one previously rated sub standard loan moves, it's not accrual, I mentioned that the last couple earnings calls.

Brian Lilly

Actually we mentioned it in the middle of last year.

Richard Newfield Jr.

True, true, but I'll also just give you this additional perspective. Subsequent to September 30 a significant equity infusion was received which helps to stabilize that company, it will remain on non-accrual for now but we did get a nice pay down and do see some improvement there just based on the capital and liquidity improving. We had another non-accrual that was -- we took a charge in the third quarter but ultimately received proceeds to resolve subsequent, so you'll see that change as we're into the fourth quarter. And really other than that you saw the action taken on the midstream and we have one production client that remains in that non-accrual status. Perhaps the best way to characterize it is we need a strengthing oil prices to really see meaningful improvement in that but it seems to be holding up at current levels based on 40s and low 50s.

Timothy Laney

It is fair to say, Matt, that the handful of relationships that Rick was talking about last year is the handful of relationships we've been working to resolve this year and we really feel like for the most part that work is now behind us and absent some catastrophic change in the industry, we really are pretty optimistic about where we're at in that space on a go forward basis. Keeping in mind that it represents around 3% of our total exposure.

Brian Lilly

Tim, I might add to that. Matt, the performing portion of the portfolio I mentioned in my comments was stable to improving and we feel very good about the status of that other 73 million, so it really is that $13 million that we continue to work carefully on.

Matt Olney

Okay. That's very helpful. Thank you for that. And then on the expense side, you guys had made a lot of progress last few years on expenses, especially in the last year or so. Can you give us a better idea of what's remaining within expenses that you can help manage that flat to down that you've talked about previously?

Brian Lilly

We've been focused on expenses and so somebody says expenses I do think about the $212 million expenses, handful of years ago to be at the mid 130s now, it’s great progress but we're right in the middle of our planning process, Matt. We will be concluding that and give you some detailed guidance here in January but I think we'll just -- we'll wait till then to give your thoughts for 2017.

Operator

Your next question comes from the line of Chris McGratty of KBW.

Kelly Mata

Hi, this is Kelly Mata on for Chris McGratty. Thanks for taking my question. Most of my questions have already been asked and answered, but looking at your balance sheet remix with the securities continuing the decline as a percent of earning assets, and are now 33%. And with your loan deposit ratio now at 74%, do you think there's more that can be done here in terms of the dollar amount of securities continuing to decline? And where do you see these ratios settling out?

Timothy Laney

Well, I think a good question, Kelly. And as we've said a couple times a couple times, and I have answered that in a few venues, 15% investment portfolio as a percentage of earnings assets we think is the long term targets. We will continue to work investment portfolio and loan to deposit ratio in concert with that goal.

Operator

Your next question comes from the line of Tim O'Brien of Sandler O'Neil.

Tim O'Brien

First question I have for you is just back to you, Rick, on the energy book. Just looking out a little bit differently, what percent of that $86.6 million is pass at this point? Can you tell us that?

Richard Newfield Jr.

Sure, it’s about 75% -- I am sorry, of the 86.6 million, it’s about 75%, so there are a couple special mention credits but we do see opportunity for upgrade to pass in the coming quarters. So in addition to the 13 million, that’s obviously rated sub-standard.

Tim O'Brien

And then you said that there was some subsequent action equity raise behind the $3.3 million energy credit you guys downgraded this quarter?

Richard Newfield Jr.

That’s correct. A nice equity infusion and we did get a meaningful paydown in the first week or so of October.

Tim O'Brien

Okay, so that will show up in the fourth quarter, plus anything additional that they did at the Company that your client does in this quarter is going to show up here pretty quickly?

Richard Newfield Jr.

Yes, correct.

Tim O'Brien

I got good color on the repurchase outlook from here. And good color on when you guys are going to provide guidance on 2017 in the strategic planning process. One other question is: say the Fed raises rates 25 basis points in December, can you talk a little bit about what the impact might be on NII that could come out of that, if any?

Richard Newfield Jr.

Look there's lots of assumptions that go around that but as we model that it would be $1 million to $2 million depending -- depending on what the industry does with deposit rates certainly to the higher end of that if deposit rates don't move very much. And assuming that the market prices it into the loan spread, not because there's a twenty five basis point increase in a loan spread just that it doesn't narrow the loan spreads. So we definitely – we’re asset sensitive. If you look at one hundred basis points shock which is a common industry practice at the six, $6.5 million to NII as you think about longer term. These moves on a quarterly basis really depends a lot on the competitive environment.

Tim O'Brien

And so that last move that we had a year ago, was kind of -- Tim, you characterized that the market didn't react rationally to that, I guess, right? But hope springs eternal this time around?

Brian Lilly

Well if the Fed decides to raise, I think that’s certainly the first if. We've been through this discussion as an industry for years. We're positioned -- look we're positioned to be asset sensitive and will benefit on the ups and then it's really a competitive question after that. And yes we didn’t see the marketplace grab a 25 basis points into the spreads on the loans.

Tim O'Brien

Thanks, Brian. And then one last question for you, Tim. Can you give any geographic color to the production, loan production, that you guys generated this quarter? And how is Colorado holding up relative to Kansas and such? And where are you looking to generate your business in the fourth quarter?

Timothy Laney

Sure, I'll say, first we began the fourth quarter with the strong as first two weeks of a quarter in the history of the company and we continue to benefit from operating in markets that are performing above the national average in almost every economic metrics. So we fully expect primarily the front range of Colorado and the Kansas city metropolitan market to continue to deliver for us. Our focus as it has been from the beginning is to build relationships with both businesses and individuals and it's really pretty simple blocking and tackling. So I would tell you we remain focused on our core markets.

Tim O'Brien

Thanks a lot guys.

Timothy Laney

Thank you Tim and there were – Kelly, I should pause. Are there any other questions in the queue?

End of Q&A

Operator

Thank you. I am showing no further questions at this time. So I do turn it over to Mr Laney for his closing remarks.

Timothy Laney

All right. Thank you Kelly. I will say that there have been a number of questions offline about the dividend increase and how we should all be thinking about that and I think the best way to frame it up would be a target is moving toward that 30% payout range. And so we all expect more positive action on that front. I just wanted to ensure that we were covering that publicly and sharing our thoughts around future dividend increases. So with that covered I will thank everyone for your time this morning, thank those of you that asked questions and wish you a good day and a good weekend. Thank you, Kelly.

Operator

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 4, 2016 by dialing 855-859-2056 or 404-537-3406 and referencing the conference ID of 92242655. 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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