NBHC
#Thanks, <UNK>, 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, <UNK> <UNK> and <UNK> <UNK>, our Chief Risk Officer.
I'm 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 12 months and more important, we continued 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 <UNK> <UNK> to cover our credit metrics in more detail.
Thank you, <UNK> 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 will 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 the 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 in OREO over time, just that the timing is less predictable.
As <UNK> and <UNK> mentioned, it is exciting to deliver on our goal of $1 billion loan originations over the last 12 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 payoffs and paydowns plus the charge-offs, lowered the growth rate this quarter by approximately $60 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're 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 12 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 acquire problem loan paydowns in addition to deposit growth.
As a result we're 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 of 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 yielding 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 details we're 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 remeasurement process.
<UNK> did an excellent job addressing credit quality, and please refer to his comments for our 2016 guidance.
Noninterest income totaled $11.6 million and included good linked quarter net growth of 9% annualized when combined in the categories of [server] charges, bank card fees and gains of a sale of mortgages.
We also benefited from the collection of $0.9 million on FDIC-acquired loans that were charged off prior to acquisition and is 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.
Noninterest expenses totaled an excellent $33.4 million in the quarter came in better than our quarterly guidance.
Higher than forecasted OREO gains drove a net credit from OREO in problem loan expense of $0.9 million.
For the fourth quarter we reiterate our expense guidance of $34 million to $35 million, which doesn't 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 remain strong with $65 million in excess capital using the 9% leverage ratio.
Also the remaining buyback authorization was $18.8 million at September 30.
<UNK>, that concludes my comments.
Thank you, <UNK>.
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 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 <UNK>, on that note I will ask you to open up the lines for questions.
Yes, we did.
It was primarily in our commercial, our C&I lending; it was a bump over we've had the first couple of quarters.
We've been running in that $140 million to $150 million, and we had $190 million month in all payoffs and paydowns, so it did jump in that particular category.
I would add that we are now viewing our special assets teams 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 while, <UNK>, your question is a great one and we're not ready to forecast specific returns or gains in those categories, I think you're going down the right path in terms of thinking about the opportunity there.
<UNK>, 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, accounting says we have to book it against is the contrary expense down there.
And that's really the point of your question was the OREO gains is down as a contract expense, and I wanted to make sure you thought about the other three categories.
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.
<UNK>, good morning.
No.
Let me add to that.
It's been running around that 0.36% for several quarters now.
We would certainly like that to be higher.
I think as one of the things that shocked us a little bit coming out of last year, is when the Fed raised it 25 basis points.
We saw the competitive marketplace where we do business really just give that away.
Of course everybody came out and said 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 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.
That's the story behind that.
If you 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 a little bit with the number of days.
And so you do see, interesting enough, you see overdraft occurrences come down.
You see bank card fees go up, typically not offsetting that and mortgages do come down a little bit.
So, yes.
I definitely mentioned it in the middle of last year.
It is fair to say, <UNK>, that the handful of relationships that <UNK> 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 represent around 3% of our total exposure.
<UNK>, I might add to that.
<UNK>, the performing portion of the portfolio, as I mentioned in my comments, was stable to improving and we feel very good about the status of that other $73 million.
There really is that $13 million that we continue to work carefully on.
You know we've been focused on expenses, and as soon as somebody says expenses I do think about the $212 million we spent just a handful of years ago and to be at the mid $130 millions now is great progress.
We're right in the middle of our planning process, <UNK>.
We will be concluding that and giving you some detailed guidance here in January, but I think we'll just wait until then to give you our thoughts for 2017.
<UNK>, thank you so much.
Good question, <UNK>.
And as we've said a couple of times, I have answered that in a few venues.
15% investment portfolio as a percentage of earning assets we think is the long-term target.
So we'll continue to work investment portfolio and loans to deposit ratio in concert with that goal.
Thank you, <UNK>.
Sure, <UNK>.
Look, there's a lot of substance that go around that, but as we model that, it would be $1 million to $2 million 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 that there's a 25 basis points increase in the loan spread, just that it doesn't narrow the loan spread.
So we definitely ---+ we're asset sensitive.
If you look at 100 basis points shock, which is a common industry practice, it would be $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.
Well, if the Fed decides to raise it ---+ I think that's certainly the first if, <UNK>.
We've been through this discussion as an industry for years.
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 did see the marketplace grab the 25 basis point into the spreads on the loans, or hold I should say.
I will say first, we began the fourth quarter with this strongest 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 metric, 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.
Thank you, <UNK>.
<UNK>, I should pause.
Are there any other questions in the queue.
Thank you, <UNK>.
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 of moving toward that 30% payout range.
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.
