NBHC
#Thank you, Lisa.
Well, good morning, and thank you for joining National Bank Holdings Second Quarter Earnings Call.
I have with me our Chief Financial Officer, <UNK> <UNK>; and Rick <UNK>, our Chief Risk Management Officer.
We continue to be very pleased with the progress and pace of our organic growth.
Our teammates delivered another quarter of strong loan growth, deposit growth, banking fee income growth and solid expense control.
Credit trends are in line with our plan, and trends are, in fact, very positive across our diverse portfolio.
We're also pleased with the response to our recently announced planned merger with Peoples.
I look forward to our associates coming together, continuing to build quality relationships with our clients and delivering greater returns for our shareholders.
To that end, this quarter marked another milestone as our Board of Directors declared a $0.09 per share dividend on May 3, 2017, which represented a 29% increase from the previous dividend of $0.07 per share.
The increase demonstrates the continued confidence of our Board of Directors and management team that our company is in the financial position to provide very strong future growth opportunities.
We feel very good about our accomplishments during the second quarter.
And equally important, we are pleased with the outlook for the rest of the year.
And on that note, Rick, I'll turn the call over to you.
Thank you, Rick, and good morning, everyone.
As you saw in yesterday's release, we delivered $0.33 earnings per share, with return on tangible assets of 87 basis points and a return on tangible equity of 8.2%.
All of these results compared favorably on a linked-quarter and year-over-year basis.
In fact, it could be argued that the second quarter was one of the best in our company's relatively short history.
In my following comments, I will touch on the results of the quarter and update our guidance.
Led by strong commercial loan growth of 33.7% annualized, the total originated loans outstanding grew 22.7% annualized.
After factoring in the acquired loans, the total loan book grew at an annualized rate of 18.2%.
For the first 6 months, total loans have grown 16% annualized on the strength of the originated book growing 20.3%.
We are also very pleased that the new loan pricing has reflected the benefit of recent increases in short-term rates.
For the quarter, the total fundings of $270 million had a weighted average yield of 4.1%, with about 2/3 being variable rate.
Recall that at this time last year, we were discussing mid-3% for new loan rates.
For the last 6 months of 2017, we continue to see good commercial loan demand driving the total originated loan outstanding to above 20% growth for the year.
Offsetting the originated loan growth is the normal pay downs in the acquired loans, plus we expect to realize a few large paid-offs in our 310-30 book.
As a result, we are resetting the full year total loan growth guidance to 15% to 20%.
Turning to deposits.
We completed the sale of 4 banking centers and realized a $2.9 million gain.
Adjusting for the sale, total average deposits grew a nice 4.9% annualized.
More importantly, the growth was driven by increasing noninterest-bearing demand deposits as our relationship banking model continues to build our small and midsized business client base.
The cost of total deposits was 40 basis points in the second quarter, an increase of 1 basis point linked quarter and just 5 basis points on a year-over-year basis.
We are reiterating our prior guidance of delivering average total deposit growth for the year, led by mid-single-digit average transaction deposit growth, while keeping time deposits flat after the reductions for banking center sales.
Due to the timing of the banking center sales and the impact on the quarterly averages, we would expect the third quarter averages to be closer to the second quarter.
Fully taxable equivalent net interest income totaled $83.3 million, increasing $2.3 million, on the strength of growing earning assets and an 11 basis points widening on the fully taxable equivalent net interest margin to 3.55%.
We are clearly benefiting from our emphasis over the years on the variable rate pricing in the commercial loan portfolio.
We also benefited from higher levels of 310-30 accretion income, which we've calculated the benefit to be approximately 5 basis points on the margin and $500,000 of additional accretion income in the second quarter.
For the second half of 2017, we are not including any increase in short-term rates, and are therefore forecasting a fully taxable equipment net interest margin at the higher end of our prior guidance of 3.4% to 3.5%.
We are also forecasting an accelerated reduction in the 310-30 accretion income given the paydowns that we expect.
The accretion income for the third and fourth quarters are targeted at $5.5 million and $4.5 million, respectively.
Adding a flat to slightly increasing earning asset base and the net interest income is forecasted to increase slightly from the second quarter's strong level.
Rick provided the credit quality overview and our outlook for the rest of the year.
Adding in our loan growth guidance, we expect the full year provision for loan losses to be towards the lower end of our prior guidance of $10 million to $13 million for the year.
Noninterest income totaled $12 million or $9 million, excluding the $2.9 million pretax gain on the banking center sales.
It compares favorably to the $8.7 million recorded in the first quarter.
We reiterated our guidance of mid-single-digit growth collectively for banking fees and expect to end the year with total non-interest income in the range of $39 million to $41 million.
We continued good trends in noninterest expenses as they totaled $33.4 million, improving from $34.6 million in the first quarter.
The second quarter included Peoples' merger-related expenses of $298,000 as well as the nice gains in OREO.
For the first 6 months and as we guided, OREO gains have offset the expenses of OREO and problem asset workouts.
We reiterate our full year expense guidance of $136 million, including a net 0 impact, if not better, from net OREO and problem asset workout expenses.
Additionally, we currently see less OREO gains potential in the third quarter versus some nice pickups in the fourth quarter.
As additional guidance, we will incur integration expenses related to the People's acquisition over the next few quarters.
We are forecasting nominal expenses in the third quarter with $3 million after tax in the fourth, and $5.6 million after tax in the first quarter of 2018.
You will note that these add up to $8.8 million after tax and are less than the $13 million we shared with the merger announcement.
The remaining $4.2 million will be incurred by Peoples prior to the merger closing and are included in the tangible book value targets to be delivered at closing.
Regarding taxes, the tax rates came in consistent with our prior guidance when adjusting for the $548,000 tax benefit realized on previously issued performance-based equity awards.
For the last 2 quarters of 2017, we're expecting an effective tax rate in the range of 20% to 22%.
Of course, this is before any additional tax benefits realized in the coming quarters on previously issued performance-based equity awards.
When using the fully taxable equivalent net interest income amounts, our guidance is unchanged for a fully taxable equivalent tax rate in the range of 29% to 31%.
Capital ratios remain strong, with $55 million in excess capital at quarter end using the 9% leverage ratio.
Tim, that concludes my comments.
Thanks, <UNK>.
Well, I'm very proud of the collective achievements of all of our teammates as we continue to build a leading community bank franchise.
It's not lost on us if we'd benefit from doing business in attractive markets that continue to perform better than the national averages on virtually every economic metric.
We believe that the combination of strong talent and great markets will continue to translate into growing returns for our investors.
Finally, I want to share how pleased I am that the Winter family and their teammates at Peoples chose to partner with NBH.
We could not be happier with the prospects of this combination.
Again, thanks for calling in today and for your interest in our company.
And Lisa, I would ask you to please open up the line for questions.
Sure.
A couple of pieces to that.
Maybe the context of the acquisition is, for a start, that their loan-to-deposit ratio.
Peoples' loan-to-deposit ratio was in the mid-70s, which is similar to ours.
So we're creating some liquidity and additional headrooms, which is exciting for us.
We're very comfortable taking our loan-to-deposit ratio up much higher than the 80% that we have and it would feel that our banking centers' ability to produce deposits as well as the commercial relationship model that we have can produce more deposits.
So as deposits are growing, that's running with the loan-to-deposit ratio, and you've taken that above 90%.
90-plus percent is fine.
On the other side of it, you take the investment portfolio, which currently runs about 20%.
We're very comfortable at taking that down, 10% to 15%.
We haven't really focused on a number, but what you need for liquidity and a little bit of a collateral pledging is all we need.
And we see that as more of the end state is where we'll be, and the investment portfolio is running down at about $300 million a year at the current run rate.
So that kind of gives you some of the feel of the balance sheet dynamics.
Turning to the deposit beta.
We consistently modeled the beta in the mid-30s, kind of low 30%, all weighted in.
And obviously, we've all seen much less than that and enjoying that in the margin expansion and certainly feel that, that's going to be there for the short term.
Our markets have been very reasonable, haven't seen any large breakouts by anybody in particular.
So in energy, look at our 5 basis points increase year-over-year for our total deposit cost versus arguably, 75 basis points movement in the short-term rates.
Now we are in our (inaudible) and I'm sure other banks are talking about the acceleration that could happen.
So as we model going forward, it's nice to just, kind of in a static way, think about that 30s percent range for beta.
But there could be a catch up.
And so we're certainly making sure that we're prepared for that and making sense of it as we go forward.
Chris, it's important to look at the math, but it's also important to look at the strategy and tactics.
From day 1, we've talked about building a company that doesn't operate with singularly-focused lenders.
We have bankers, whether they're a small-business bankers or commercial bankers, focused on treasury management, capturing the core operating accounts of our clients.
Where you find yourself most immediately vulnerable in rising interest rate markets is, of course, with money markets, CDs, the various time instruments.
Holding on and growing those core operating accounts is, in my mind, the strongest business hedge against that price inflation.
And one thing we're particularly excited about is the growth we're seeing in our operating balances with small businesses.
That's been a focus that we've talked about.
We're seeing results there.
We expect it to continue.
All of our bankers have balanced scorecards.
They cannot optimize their compensation without capturing those operating accounts, that deposit business with clients.
And we believe that's a real key to growing a quality franchise.
So that may be a little more info than you were looking for, but I think that ties the strategy to the math.
<UNK>, I wanted to clarify the margin a little bit.
Just the 3.55% reported included 5 basis point benefit from accretion.
What was that in Q1.
The accretion benefit.
It really didn't have any specific pickup in Q1.
So you saw ---+ and as you looked at our trend, Jeff, it's a little unusual for us to have 310-30 income higher in subsequent quarters.
So as you look at the $6.2 million in total that we recorded in the second quarter versus the below $6 million in the first quarter, that tells you that we've got a little bit of benefit.
And it's not just one ---+ it wasn't one credit, we actually picked up several broad-based in the number of the resets that we do every quarter.
So it was nice to get.
That's why I gave this specific guidance in the coming quarter so ---+ that drop into our target level ---+ not target level, but our best estimate right now is 5.5 in the third quarter and 4.5 in the fourth quarter.
And that's an accelerated decrease.
But as I mentioned, we expect some larger payouts in the 310-30 book.
Okay.
So if I were just to point-to-point, if your 3 ---+ 11 basis points of sequential increase, 5 basis points of that was on accretion, the other 6 was sort of a core margin increase.
So then the guidance on the 3.4% to 3.5% and saying that the high end, that includes any accretion.
So if you're at 3.55% effectively, sort of treading ---+ and I guess the 5.5% that you identified in Q3, you're essentially saying the core could be coming in, in Q3.
No, no.
The core is going to be increased, depending on how you define core for a while.
But in our balance sheet, we're always working against that 310-30 coming down.
And it's hard to replace 17% earners.
And so there's a little bit of a trade and it's always happening, it happens through the margin.
Fair enough.
Okay.
And then maybe a broader question, maybe for Tim.
Just on the M&A side.
Would you be entertaining additional deals at this point.
Or are you kind of focused on the closure of Peoples and integrating that down the road.
It's an interesting question, Jeff.
We're actually seeing an inflow of interesting opportunities as we speak.
But our focus is on a successful closure and integration of Peoples and maintaining our organic growth.
We, as I think we demonstrated with Peoples, are going to be extremely smart about the kind of partners that we work with.
In the case of the Winter family, they genuinely believed in the long-term play in our company, essentially investing in our company.
And it allowed us to put together a transaction that we felt made great sense for everybody involved.
So that may be a long way, Jeff, of saying I think those opportunities actually come along few and far between.
Yes, that would be true.
Not only do we, but we continue to strive to not allow our business bankers with our smaller clients to fall into the LIBOR trap.
A lot of our small business clients understand prime, relate to it better.
And oftentimes, I find if you're not careful, a banker will lead the client to LIBOR versus leaving them at prime where they're more comfortable.
So it's actually a really intriguing question, Tim, it's something that we're focused on delivering as an important option to our clients, particularly small business clients.
Yes, perfect.
Thank you for asking.
It's a profit center we spent a great deal of time talking about.
Rick, you really ought to back up.
And again, just talk about, even on a macro level, where we are with the remainder of our acquired loans portfolio, where we are on OREO and how we think about it not just in the coming quarter but through the rest of this year and then beyond and then you could get into some of Matt's other detailed questions.
In fact, I would suggest fourth quarter should be very nice.
And do you want to talk about kind of historical returns out of that OREO portfolio or is that something you're comfortable talking about.
Yes.
Because what happens is, as you know, Matt, is the acquired problem loans, you really ---+ you pick up that gain, so to speak, through the accretable yield that gets flushed through.
And that's why even that accretable yield, when Jeff was asking about first quarter versus second quarter why that accretable yield can tend to be a bit lumpy, right.
I do think what's interesting as we talk about not to confuse matters, but the remaining acquired problem loans of 310-30 pull.
If you look at all of that kind of collectively outside of the organic book is to think about getting to a point where I would say now over the next 9 to 12 months, we'll burn through the vast majority of those OREO gains and should see nice pickups again, somewhat lumpy.
But we do view that OREO booked.
The way we're working it, it's nothing but a profit center.
And then what will be interesting as we work down through the remaining of these acquired loans.
I think what will be interesting is we will eventually get to a core, and we think we're getting very close to a core portfolio that will just be naturally amortizing and yet maintain a very high yield over the remaining life of that loan.
we won't see as much acceleration.
We won't see as much lumpiness.
It will just be a very attractive annuity while it lasts.
Anything you would add.
And is that a fair characterization, <UNK>.
Yes, yes, perfect.
All right.
Thank you, Lisa.
I want to thank Chris, Jeff, Tim and Matt for their questions this morning.
All right on the mark.
And thank you all, again, for your interest in our company.
Have a good day and a good weekend.
