NBHC
#Thanks, Mike.
Good morning, and thank you for joining National Bank Holdings' First Quarter Earnings Call.
As usual, I have with me our Chief Financial Officer, <UNK> <UNK>; and Rick <UNK>, our Chief Risk Management Officer.
I am pleased to share that our pretax earnings were in line with our expectations, and you'll also see that we realized a meaningful tax benefit during the quarter.
Loan production was solid, with our teams delivering a 20% increase in production over first quarter of 2016.
Our growth in deposits was primarily driven by a 6.3% increase in annualized growth in our low-cost deposits.
Noninterest income was in line with guidance, and then expenses were flat to the fourth quarter.
I'll add that we feel very good about our momentum going into the second quarter.
Finally, as I turn the call to Rick, I'll encourage you to pay particular attention to his comments on the diversity and granularity of our portfolio.
While there's no doubt that our commitment to diversification makes growth more difficult, we continue to believe that this discipline will translate into more reliable returns over time.
Rick.
Great.
Thank you, Rick, and good morning to everyone.
As you saw in yesterday's release, we delivered $0.30 earnings per share with return on tangible assets of 81 basis points and a return on tangible equity of 7.7%.
We continue to make progress towards our financial goals of 1% return on tangible assets and a double-digit return on tangible equity.
There's a lot to like in the first quarter, as we realized solid trends in loans and deposits, fee income, credit quality and expense control.
In fact, we are delivering on our 2017 guidance provided last quarter, and as a general rule, we are reaffirming that guidance.
Included in the results was a tax benefit of $2.8 million or $0.10 per share from the realization of previously issued performance-based equity awards.
Recall that prior accounting recorded these tax benefits directly to capital.
Partially offsetting this benefit was almost $0.02 of net problem asset workout and OREO expense in the quarter.
I point this out as we have guided these expenses to a net 0 for the year, and we see this as simply a timing difference and fully expect a net 0 to even a net positive impact for the year from OREO gains more than offsetting the problem asset and OREO expense.
I should mention the economic assumptions inherent to the 2017 guidance.
Our markets continue to outperform the national averages, and we see nothing to disrupt this trend.
With regard to interest rates, recall that we included just one 25 basis point move in June in the prior guidance.
We got that one move in March.
The current consensus is for additional rate increases going forward.
Given our asset-sensitive balance sheet, we would continue to benefit from increasing interest rates.
However, reflecting a level of conservatism in our forecasting, we've not included any additional rate hikes.
Loan growth has gotten off to an excellent start, growing 13.1% annualized.
The first quarter has been historically slower, so we were pleased with the start to the year.
It's worth noting that our originated loan book grew 17% annualized, led by the commercial portfolio growing at a very strong annualized rate of 22.3%.
Our pipelines continue to be robust, and we are reaffirming the full year total loan growth guidance of around 20%.
Turning to deposits.
We had a good linked-quarter average deposit annualized growth of 5.5%.
This growth was led by a 6.3% annualized growth in low-cost transaction deposits.
Just as noteworthy is the fact that we grew average transaction deposits on a year-over-year basis 3.4% while consolidating 8 of our banking centers over the last 12 months, representing an 8% reduction of our banking center footprint.
In the second quarter, we are on pace to complete the 4 banking center sales that we mentioned last quarter.
These banking centers represent approximately $100 million in total deposits, with half in time deposits and about $14 million in total loans.
We are reiterating our prior guidance of delivering total deposit growth for the year, led by a mid-single-digit transaction deposit growth while keeping time deposits flat after the reduction for the banking center sales.
Fully taxable equivalent net interest income totaled $36 million with a net interest margin of 3.44%.
We are right on target with the guidance we provided last quarter.
We also guided that we expected to reach a linked-quarter net interest income growth inflection point for the year, as interest income from loan growth is expected to more than offset the decrease in high-yield 310-30 accretion income.
We are very pleased to be forecasting linked-quarter growth for the second quarter and for the remainder of the year.
We are increasing the net interest margin guidance range to 3.4% to 3.5% and keeping the earning asset guidance at $4.4 billion to $4.6 billion at year-end.
Given the prospects for increasing interest rates, let me share a few comments on interest rate sensitivity.
We continue to be about 4% asset-sensitive given a 100 basis point parallel shift in the rate curve.
We model a weighted mid-30% deposit beta, which continues to show a very conservative, given actual deposit rate moves over the past year.
Given that the rate curve has not been moving up in an orderly fashion, we often get asked about the loan portfolio sensitivity.
About half of the originated book, or about the mid-40s percent of the total loan book will move with changes in short-term rate indexes such as the 1- and 3-month LIBOR, prime rate and others.
We're beginning to realize the benefits of March's rate move and would welcome additional rate increases going forward.
Rick provided a credit quality overview and our outlook for the rest of the year.
Adding in our loan growth guidance results in an expected full year provision for loan losses in the range of $10 million to $13 million.
Noninterest income totaled $8.7 million, coming in at the middle of the first quarter guidance of $8.5 million to $9 million.
We reiterated our guidance of mid-single-digit growth collectively for banking fees.
In addition, we are on track to realize the second quarter estimated gain of $3 million on the previously mentioned banking center sales.
We continued good trends in noninterest expense as they totaled $34.6 million in the first quarter, basically flat with the fourth quarter.
As I mentioned, the quarter did include net expense of $760,000 related to problem asset workout and OREO.
We reiterate our full year guidance of $136 million, including the net 0 impact, if not better, from the OREO and problem asset workout expenses.
Regarding the tax rate, we are repeating prior year guidance, with a forecasted 2017 effective tax rate in the range of 22% to 24% and a fully taxable equivalent tax rate in the range of 29% to 31%.
Capital ratios remained strong with $55 million in excess capital at quarter end using a 9% leverage ratio.
One final comment would be that we have forecasted average fully diluted shares to be in a tight range of 27.7 million to 28 million.
Tim, that concludes my comments.
Great, <UNK>.
Thank you.
Mike, why don't we go ahead and open up the call for Q&A.
The good news is we continue to have solid growth in our core markets of Colorado and that Kansas City, Overland Park market of Missouri (sic) [ Kansas ].
Texas has been a little slow in our markets of Dallas and Austin to ramp up this year a little slower than even we expected, given the quality of those markets.
But we're very excited about what we're seeing developed in the pipeline there.
In terms of competition, so many of the independent banks, community banks that are in our markets continue to be heavily focused on CRE, and that's evidenced if you look at their balance sheets, that I would tell you, in Kansas City, Overland Park, the real competitors there are UMB and Commerce.
They both do a great job, obviously well-entrenched banks in that market, and yet tend to be rational, which we like.
They're smart when it comes to credit and they're rational on pricing.
In Colorado, it's a little bit of a mix, but we have benefited in particularly over the last 6 months.
And we see that trend continuing from some fallout of one of the larger national banks.
Yes.
Our ---+ I'll tell you our expectation in terms of impact on the income statement is really neutral this year.
Having said that, I'm a little disappointed with the pace of our partner on that effort.
They've run into a few roadblocks on their side, but they remain confident that we're going to be able to deliver and have those additional network points delivered here this year.
And we're still pressing for this summer.
So I think, from a financial standpoint, neutral this year; from a timing standpoint, not moving at the pace that we were initially promised.
It's actually right on top of it, Chris.
I'm glad you asked that question.
As you've heard us talk before, we've consistently been in that 60% variable in our production range.
In this past quarter, it was actually 66% for a weighted average yield of 4% even and as you might recall it wasn't that long ago, we were talking about 3.6% as a new loan yield so, to your point, it's dilutive to that particular category.
So we're real pleased that we are seeing in the details of the new production coming on that's becoming equal to, and we expect shortly to see it be accretive to that yield.
Yes.
It's a little difficult to do that on so many assumptions that get into it.
So what I did play ---+ so what I did repeat to you, we're 4% asset-sensitive.
Now that's a little over $6 million when you think about it on an annual basis.
And inherent in those assumptions are certainly the asset sensitivity that we have plus about a 30 ---+ mid-30s deposit beta.
Looking ---+ as you look historically, at least recent historically, it's fun to look at our deposit costs.
Our interest-bearing deposit costs only increased 6 basis points while rates have moved 50 basis points ---+ well, actually, 75 basis points most recently, but 50 in the last 12 months for practical purposes.
So I think we're a little conservative on the deposit side.
I think, as you look at your guesses as to that 25 coming or not, I'll try to give you the loan specific that you can model in.
Our total loan portfolio would move about 40%, and so that's short-term rate movements.
And so as LIBOR moves ---+ certainly, prime rate hits very quickly and treasuries and other indexes we might have, but as LIBOR moves, you'll see that come through our loan yield first before anywhere else.
Hey, Chris, I'm going to lever your question and <UNK>'s response to thank our teammates for their continued focus on expanding our client relationships.
We feel very good about the growth in our low-cost transaction account business.
And that's just part of good relationship-building with our clients.
And if you think about that growth in light of reducing our distribution network by 10%, it's even more meaningful.
But more important than that, I would tell you is we're seeing very nice momentum on that front.
So to <UNK>'s point, as you think about the influence of those low-cost deposits which come with core operating accounts, that's just the nature of that business.
That's an attribute that we're going to get, whether we see those interest rate hikes or not.
And Chris, if I could, just one last piece.
So I did ---+ to provide some guidance of the 3.4% to 3.5% on the net interest margin, and we ---+ as we currently model out with no rate hikes, we'd be in that tight range through the rest of the year on a quarterly basis as our loan book ---+ as our originated loan book yield's going to go up but we're still running against some of that 310-30 yield burning off.
Chris, really nothing from our side.
I think you've heard us consistently for 4 or 5 years here that we are very focused on the use of capital and the best return for that.
We're certainly projecting great use in our relationship banking and growing those.
But there will be additional capital that's accessed there.
We've taken full advantage of buying into our shares.
And look, the market has given us at least the start of a reasonable share price, from our perspective, that becomes a little bit more attractive in expanding our own footprint.
So we will continue to focus on opportunities that best leverage that at full returns.
We've ---+ we moved through a number of those floors.
So that's pretty much our book.
Yes.
Look, we're constantly looking at the performance of each of our banking centers, each of our profit centers for that matter.
And we look at the contribution of that banking center ---+ or the ---+ each banking center and each profit center relative to the potential or the opportunity in the market it serves.
And so you can imagine, our focus is on those lower-performing profit centers where there's lower potential.
We think we've identified the group that really, in our operating model, didn't have the opportunity to ---+ or the potential to contribute within our expected time frame.
And we'll continue to monitor the rest of the profit centers on the same basis.
So I would tell you it's very dynamic, and we're going to continue to have accountability, and that accountability will drive further actions.
Rick, I may be opening up a box here that <UNK> will want to close quickly, but why ---+ because we're not in a position in this meeting to share details, but you ought to talk about, while we're not required to conduct a stress test, you ought to explain to the group how we do internally stress our own portfolio.
And the bottom line is, when we do that work and factor in those very severe loss levels, we still operate as a well-capitalized bank post that kind of an experience.
And Tim, I know that's a lot more than you asked for, but I'd like to get to a point where we could even provide more transparency around that testing and what we do.
Again, it's not a regulatory requirement, but we think it speaks to the quality and the importance of the diversity of the portfolio.
Tim, it's really a focus on a set of very high-quality clients with deep relationships.
The challenge we have is that almost all of them were able to successfully raise large tranches of equity in the downturn.
And if anything, we've seen our senior bank debt come down.
Many of them are sitting on the sidelines waiting for opportunity to acquire assets at the right values.
And until that happens, I would expect our exposure in that space to either maintain current levels or even decline slightly.
Yes.
No, look, that\
No, probably more normal, where the fourth quarter was a little higher.
Yes.
Yes.
We're going to see a benefit from the March move that happened.
Yes.
Look, and maybe I'll point out a couple of things on that spot versus the average.
You'll also note that our loan deposits ---+ or excuse me, our loan growth, which grew at 13% on a spot basis, grew less than 1% on an average.
And so the average earning assets are going to see a nice pickup as we go from the first to the second quarter, which will help, remember that guidance on that net interest income.
Now back to the investment portfolio, we saw an opportunity with the deposit activity that Tim's mentioned in our book to go ahead and place some investment securities on the book.
Not a lot.
We haven't done anything in 4 years.
But we added just under $100 million of MBSs because we still like the cash flowing from them.
We were able to pick up a yield of 2.6%.
We saw that as an opportunity here in the first quarter.
And as I guided last time, we didn't see that we were going to recur doing that as the quarter goes on, probably see that book continue to come down in our forecasting for the second, third and fourth as we fund the 20% ---+ around the 20% loan growth that we had guided.
Yes.
We were looking for the mid-single digits on a year-over-year growth.
And look, we were real pleased that we hit the first quarter.
You might recall I ---+ we gave specific guidance of $8.5 million to $9 million, so getting that $8.7 million in the first quarter was right on top of that.
But on the full year, look at it as a year-over-year on mid-single digits.
We picked up a little bit on our commercial clients back to back.
Not as much as we're expecting.
We certainly have a lot more conversations in that.
So it was a couple hundred thousand dollars.
And not much in the marks for the ineffectiveness that you have to take on those things.
But ---+ so really a pretty quiet quarter there versus last quarter.
You saw a big pickup that's going to reverse the number of the rate moves for 2016 in total.
Yes.
No, the ---+ it's ---+ look, the effective tax rate, without the fully tax affected, we feel pretty good on a quarterly basis to be in that 22% to 24%.
And then when you gross it up for the fully taxed equivalent, about 29% to 31%.
I will tell you that this new accounting standard for the vesting of share-based compensation will move ---+ continue to move that around a little bit.
Look, Tim, it's a great question.
We absolutely hold ourselves accountable for leveraging that advantage.
Said another way, we clearly see it as an advantage and, I would say, certainly, coupled with the fact that we see a number of competitors that have over-concentrated in certain specialties.
Certainly, we all have seen the number of banks that have broken 300% of capital in the CRE space.
We think, to the extent that we're willing to work with clients in the CRE space, our capacity gives us the ability to be very selective as it relates to both credit structure and pricing and, again, to take advantage of situations in the market where other banks are having to retreat.
So I ---+ it's a topic we spend a lot of time internally focused on.
And I don't know if there's anything, <UNK> or Rick, you would add, but that's the best answer I can give you.
And I know we like that, and it's a source of how we're going to drive to that 1% ROA is getting that loan-to-deposit ratio up to ---+ closer to that 90%.
And you can see there's a lot of runway.
And with the success we're having with deposits, that creates even more.
So we're excited to have that opportunity, and that'll continue to move the net interest margin and offset the 310-30 and then grow from here, as we've talked about.
So it's always been part of that strategy.
We're cash flowing out of the investments, securities to allow that to happen.
So it's a good point, Tim.
Thanks.
Thank you, Mike.
I just want to thank everyone for joining us today.
Please don't hesitate to follow up if you have any additional questions.
Good day.
