Jan 29, 2013
Executives
G. Timothy Laney – President and Chief Executive Officer Brian F.
Lilly – Chief Financial Officer
Analysts
Matt Olney – Stephens Inc. Brian J.
Zabora – Stifel, Nicolaus & Co., Inc.
Operator
Good morning, everyone, and welcome to the National Bank Holdings Corporation 2012 Fourth Quarter Earnings Call. My name is Sherin, and I will be your operator 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, loan growth, deposits, strategic capital, potential income streams, gross margin, taxes, and non-interest expense.
Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks and uncertainties, and they 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 the statements.
It’s now my pleasure to turn the call over and introduce National Bank Holdings Corporation President and Chief Executive Officer, Tim Laney. Thank you.
You may begin.
G. Timothy Laney
Thank you, Sherin. Well, good morning and thank you for joining National Bank Holdings call to discuss our fourth quarter financial results.
Today, I am joined by Brian Lilly, our Chief Financial Officer, and Rick Newfield, our Chief Risk Officer. As detailed in our release, NBH generated $0.06 per share for the quarter and we realized our eighth consecutive quarter of growth in organic loan production.
We grew our average non-interest bearing demand deposit balances 16.6% on an annualized basis and lowered our total cost-of-deposits to 48 basis points at year-end. Our net interest margin expanded to 409 basis points, driven by higher yields coming out of the ASC 310-30 loan pools and the lower cost-of-deposits.
Credit quality remained very strong with net charge-offs on our non 310-30 loans running 27 basis points for the year. We did however experienced higher problem loan in resolution our OREO expenses in the fourth quarter as we continued to aggressively address through remainder of the acquired OREO on our books.
Finally, we ended the year with approximately $400 million of excess capital and we believe we’re well-positioned to take advantage of intelligent acquisition opportunities in our markets. Now, I will turn it over to Brian to discuss our results in more detail.
Brian?
Brian F. Lilly
Thank you, Tim, and good morning everyone. As Tim shared, we earned net income of $3 million in the fourth quarter, which equaled $0.06 per diluted share.
As you saw in our results, we continue to make progress in building the organic growth capabilities of our franchise or working out the non-strategic assets at attractive return. Within the loan portfolio, we are focused on two key objectives; the growth of the strategic loan outstanding, and the decrease of non-strategic loans while maximizing return.
Strategic loans grew $41 million or 15% annualized and end the quarter at $1.1 billion, and now comprises 61% of total loans outstanding. The increase was driven by organic loan growth, as we increased production for the eighth consecutive quarter to $140 million and in particular, all commercial loan categories showed increased production.
We are pleased with our progress towards achieving our goals of $1 billion in annual origination and we’re positioned to continue steady progress in 2013. The credit quality of this strategic portfolio continues to be strong with only 0.6% of non-performing loans.
We had a very active and successful quarter exiting the non-strategic loan portfolio. These loans decreased by $132 million or 62% annualized to end the quarter at $719 million.
For the full year, we have reduced this portfolio $470 million while realizing increased value as evidenced by the increases to the accretive yield. I should note that our loan workout team is not just focused on the low hanging fruit as we have built tracking processes to ensure that we are addressing a more difficult credit.
A key evident point in the value pickup from our loan workout efforts is the accretable yield gains during 2012. The fourth quarter added $8.9 million in accretable yield against only $1.6 million in loans for impairment.
And for the year, the addition to accretable yields totaled $47.5 million against only $19 million of loans held for impairment. We’re very pleased with the balance between our organic growth and the results in pace of our problem credit resolution.
In terms of deposits, we continue to make progress with our strategy of growing transaction deposits. With average $2.4 billion in the fourth quarter, growing 4% annualized over the third quarter and now represents 48% of total deposit, a 30 percentage point improvement from the 45% at year end 2011.
The important client relationship category of average non-interest bearing demand deposits grew 16.6% annualized, as we added client relationships and realized higher deposits for account. Quarter end current deposit decreased a $193 million, due to our strategy of only retaining those acquired clients that we’re interested in developing a banking relationship inclusive of market rate time deposit.
Recall that we’ve acquired problem banks that used high rate time deposits as a source of funding. We are pleased to be retaining approximately 62% of these balances with the most recent retention over 70%.
Our strategy is focused on client relationships have worked to decrease our cost of deposits to 0.48% and represented an 11 basis points improvement from the third quarter. From a full year, we decreased our cost of deposits over 40% or 36 basis points.
Net interest income for the fourth was almost $49.6 million and we’re pleased to report that equal to third quarter. The expansion of the net interest margin by 17 basis points to 4.09% for the fourth quarter was offset by the impact of a smaller non-strategic loan and investments securities portfolio.
The margin benefited from our continued focus on lowering our cost of deposits and 7 basis points higher yield on our new assets. The higher yield is entirely driven by the ASC 310-30 loan pool as the yield improved 115 basis points to 10.79% for the fourth quarter.
The higher yield is reflective of the quarterly increases and the cash flow received and forecasted for these loans pool. Credit quality continues to trend favorably.
As you know, we believe that it’s best to understand our credit quality and the provision for loan losses along the loan portfolios of 310-30 acquired loan pool accounting and all other loans labeled as non 310-30 loans. We completed the quarterly re-measurement process with the 310-30 acquired loan pools and picked up net economic value of $7.3 million.
The improved cash flow then forecast of these loans resulted in favorable net transfer to a accretable yield of $8.9 million, while only recoding to the provision for loan losses impairment of $1.6 million. The favorable fourth quarter results bring the life to date net increase in the economic value of the 310-30 loan pool to $68.9 million.
The non 310-30 loans also experienced positive credit quality trend. These loans are primarily comprised of acquired non 310-30 loans, as well as all originated loans.
Within this portfolio, the nonperforming loans rates will remain stable at 4%, whereas the total past dues improved from 3.73% to 2.73%. In addition, we’re very pleased that net annualized charge-off’s for these loans were 27 basis points for the fourth quarter, reflecting an improvement over the 51 basis points last quarter.
The allowance for loan losses attributed to the non 310-30 loans was 1.06% as of December 31. As the provision for loan losses of $101 million covered net charge-off and provided for new loan growth.
Excluding the FDIC related income, non-interest income totaled $10.9 million and increased $1.5 million over the third quarter. The increase is driven by recoveries on assets previously charged-off.
Our initiatives for banking related fees showed progress as we grew bank card and gains on the sale of mortgages or as a typical seasonal decreases in NSF charges, lowered the service charges for the quarter. Within the FDIC related income, we recorded an increase of $1.8 in the negative accretion as the performance of the underlying covered assets improved with each quarters re-measurement, partially offsetting the increase – negatively, in negative accretion is $1.3 million increase in the recoverable expenses incurred during the quarter.
Operating expenses were flat quarter-to-quarter after adjusting for the third quarter IPO related costs and excluding the problem loans and OREO cost variances. As you know the cost associated with the process of problem asset resolution fluctuate depending on the timing of problem loan and OREO exits.
The higher fourth quarter OREO cost were driven by the higher sales and valuation activities as we were successful in selling $43 million in OREO property. In fact, we’ve worked out over $100 million of the day one OREO balances.
This is significant as in many cases these OREO properties were the most problematic. We continue to see opportunities for lower expenses in the long run.
Not just problem asset expenses but also professional fees. These two categories accounted for $12.5 million of the fourth quarter expenses and $40 million for the full year 2012.
Capital ratios remained strong, improving slightly from the third quarter. We ended the quarter with $400 million of strategic capital to deploy using a 10% leverage capital ratio.
The tangible book value per share ended the quarter at $19.17, decreasing $0.13 from the end of the third quarter. The driver of the decrease was the slightly higher yield curve as the fair value markets available for sale portfolio decreased the equivalent of $0.12 per share from the end of the third quarter.
A common convention in the industry is to add the value of the accretable yields to the tangible book value per share. The value of the year ended accretable yield balance on the 310-30 loans of $133.6 million would add a $1.54 after-tax of the tangible book value per share.
A more conservative methodology that we use to value the excess yield and then consider the timing of the accretable yield income recognition. Under this more conservative methodology, the value of the accretable yield would add $0.50 to our tangible book value per share or $19.57.
I will close by noting that we were very pleased to initiate a quarterly cash dividend for our shareholders of $0.05 per share. Tim that concludes my comments.
G. Timothy Laney
Thank you, Brian. Having closed out 2012, we turned our full attention to 2013 and we’re focused on growing our loans organically and expanding our relationships with clients while maintaining a low risk balance sheet.
Investing our excess capital in smart acquisitions that will tangibly increase our franchise value, managing our excess capital, which could include the buying in of shares. And last, but certainly no less important, expense management.
On that note, we will pause and take your questions.
Operator
(Operator Instructions) Your first question comes from the line of Ryan Nash from Goldman Sachs. Your line is open.
Unidentified Analyst
Hi, this is Jerry (inaudible). Hi, guys, this is Jarred in for Ryan.
On the M&A side, a big part of the story is obviously leveraging the $400 million of excess capital. You're about four months now post the IPO.
Can you give us a sense of what you're hearing in your conversations as to why M&A is not seeing a big pickup yet?
G. Timothy Laney
Look, consistent with what we’ve said in the past, we chose our markets in part because of the large number of banks that we believe would benefit from partnering with us. We’ve been very active and diligence during the fourth quarter and continue to be active as we speak, but I should add that what we will not do are deals that fail to meet our risk in return hurdles.
Quite frankly, the Board would turn its attention to buying and shares before we actually deployed capital into a high risk or low return acquisition. Having said that, as we said here today there is a total of 65 banks with $87 billion in assets, 30 of which these are in our markets, 30 of which have success ratios over 100 and I can’t stress enough that our pipeline continues to be really strong and in fact, we are very engaged in activities in our markets as we speak.
It’s probably also important to add that when we think about our own hurdles or potential partners, we look at transactions that would be obviously accretive to ROA we look at transactions that would have a reasonable payback period, a balance sheet that can be appropriately marked to address the existing risk on the balance sheet and all have said, John we’re looking at combinations that we believe will build tangible franchise value. So the broader question, here it is across the country, why aren’t we seeing more activity, we’ve been saying for a number of years on open-bank transactions there seems to be a spread between the bid in the end.
I can tell you we have had opportunities even here in the fourth quarter that just haven’t made enough sense for our investors. We still have a number of others in a long queue that will continue to work and we remain confident that we’ll be able to deploy capital in our markets for attractive returns.
Unidentified Analyst
Okay. That's great.
Maybe one follow-up. Turning from M&A to like your organic growth side and originations were up 9% this quarter.
It looked there was some good growth on the commercial side. When you think about getting to that pace of $1 billion of annual originations, is that a late 2013 event in terms of the run-rate?
And can you give us a sense of where you're seeing the most opportunities for growth? Thanks.
Brian F. Lilly
Maybe I'll answer that in reverse order. The opportunities are in multi-markets, we’re very excited with the pace of Colorado coming online and complementing with Kansas City that is already in place.
We have our eye firmly focused on that $1 billion we shared with you the math to get there. One of the components though, it does take time as to build that book of business that bank can generate part of that production for you.
So a lot of the production that you are seeing today are new clients and as we get that book filled, that will fuel that and drive towards it. We shared in some of the financials that we did for the IPO modeling that was more in 2014 getting to that level and a lot of progress getting there in 2013 as we build that book of business that then froze off repeat business and compliments our new client acquisition strategies.
Unidentified Analyst
Thanks, guys.
G. Timothy Laney
Thank you, Jarred.
Operator
And our next question comes from the line of Matt Olney from Stephens. Your line is open.
Matt Olney – Stephens Inc.
Hey, good morning gentlemen.
G. Timothy Laney
Hello, Matt.
Matt Olney – Stephens Inc.
Hey, the run-off of the acquired loans picked up quite a bit in the fourth quarter. How should we be thinking about the pace of those pay downs in 2013?
Brian F. Lilly
We’ve asked ourselves and planned for that a couple of different ways, we definitely want to exit when the opportunities are there and if you look at the trend that we experience in 2012, we are running about 10% a quarter for the first three quarters and then we picked up significantly here in the fourth quarter as a lot of activity came to provision. I think we’re going to be in that kind of range as we go forward, we’ve said that pool have about a two year life to them.
Of course is the tail to that and so as you think about that burning off, we look at it on that kind of page. Now if there is opportunity to move quicker and create value, we will do that, but it’s, I think the recent history is good as any gauge for what we are going to see going forward.
Matt Olney – Stephens Inc.
Okay. That's helpful.
And then secondly, can you talk about the hiring process of your relationship managers and how many bankers you have in place today and remind us of what that goal is again?
Brian F. Lilly
I'm sorry. I missed the first part of that, Matt.
Matt Olney – Stephens Inc.
I'm sorry. Where you are in your hiring process of RM's?
Where you're at today and remind us where you want to be?
Brian F. Lilly
As we have shared with you in the past, 58 commercial bankers is the number that we have firmly focused on between our two markets and certainly as Tim has shared, we’ve been in the process and continue to upgrade that talent and there is a real good core group of that developing in there and building that market share for us and then the other compliment to that is the – our banking centers where we have that goal of $4 million annual goal of production against our 100 banking centers that we have in place and those two are the – not over simplified, but that is the engine that we are focused on to generate our production.
G. Timothy Laney
And would simply stress that it’s really not about hiring lenders, it’s about hiring bankers that really are focused on delivering the full range of our services to clients and as a result driving solid growth in transaction deposits and other fee related business and we feel very good about the continued ramp-up in quality of our – both our commercial bankers and our banking center teams.
Matt Olney – Stephens Inc.
Great. Thank you, guys.
G. Timothy Laney
Thank you, Matt.
Operator
(Operator Instructions) Your next question comes from the line of Brian Zabora from Stifel Nicolaus. Your line is open.
Brian J. Zabora – Stifel, Nicolaus & Co., Inc.
Thanks, good morning.
G. Timothy Laney
Hey Brian.
Brian F. Lilly
Hi Brian.
Brian J. Zabora – Stifel, Nicolaus & Co., Inc.
A question on the other real estate owned expenses. How much of that was loss on sales and how much of that was valuation adjustments?
Brian F. Lilly
It’s a little bit of both and there was some valuation, you call it 50-50, Brian for ease of math and certainly even appreciated size of the $43 million that set place in the quarter and now it reviews our balance to that $86 million. And within that $86 million, we only have $33 million of the original day one OREOs, which has been a source of much of that work.
So as we shared, its been lumpy, where we’re pleased with the progress and the returns we are getting knowing that some of those were land valuations and we’ve all grown through those sales time to turn on here and but we feel like we are in a really good place.
Brian J. Zabora – Stifel, Nicolaus & Co., Inc.
Great. Do you have more appraisals done year-end?
Or is there any, I guess, seasonality to the timing of appraisals?
Brian F. Lilly
Well, there happened to be that’s I’ve very impressed by you Brian. We closed the quarter’s community banks of Colorado in the fourth quarter 2011 and our policy do require annual appraisal.
So there was a big chunk of those that came up for the first time that has created some of that volume, but we are really focused on getting that $43 million out that we were successful.
Brian J. Zabora – Stifel, Nicolaus & Co., Inc.
Great. And then on the loan pipeline, how does it look maybe at the end of fourth quarter versus the end of third?
Brian F. Lilly
I think both of our markets, we have monthly business reviews with our teams and they continue to generate good prospects and add to the list, then its really encouraging to see as that builds. So as we are booking the business, we are adding to the pipelines even quicker to get to our goals and so it’s a good, good prospect that are out there, and we are operating in a very good market.
We continue to perform a little bit better than our national averages, although the national moves, and the economies making the businesses, particularly the commercial work clients, a little bit more conservative in their outlook.
G. Timothy Laney
Hey Brian, this is Tim. We just remind you that what’s really interesting is we only converted the Colorado acquisitions in the middle of the summer of 2012, continue to build talent and are very encouraged by the growth in pipeline, we are seeing coming out of the state of Colorado with focus on sectors like agriculture and just core middle market company.
So, it’s encouraging at this point.
Brian J. Zabora – Stifel, Nicolaus & Co., Inc.
Great. Thanks for taking my question.
Brian F. Lilly
You bet, thank you.
G. Timothy Laney
Thanks Brian.
Operator
(Operator Instructions) You have another question from Matt Olney, from Stephens. Your line is now open.
Matt Olney – Stephens Inc.
Hi, guys. Just a follow-up in regards to your share buy-back plan; obviously that's in place but it wasn't very active in the fourth quarter and I'm sure you want to use your excess capital for M&A, but how should investors be thinking about your share buy-back plan in 2013?
G. Timothy Laney
Go ahead Brian. You start off.
Brian F. Lilly
Okay. Matt, I go back to when we announced it in the third quarter call that we clearly are focused on deploying our excess capital into opportunities that will create long-term value for our shareholders and that is our foremost objective.
We wanted to put that in place for buying opportunities and by the time we got it in place and we saw a couple of dips in our price, then plus all the rules that that you have to follow on when you can’t buy, we didn’t have a lot of activity in the fourth quarter, but we look at that economically, we look at it, so we can generate an attractive return for our shareholders on our tangible book value and a future opportunity, we will buy back the shares and so it will be above the price, otherwise we are 100% focused on deploying that into opportunity that will create long-term value.
G. Timothy Laney
I have nothing to add.
Matt Olney – Stephens Inc.
Thank you.
Operator
(Operator Instructions) And there are no further questions at this time, I’ll turn the call back over to Mr. Tim Laney for his closing remarks.
G. Timothy Laney
And I will be brief, thank you for joining us today and look forward to speaking to you in the future. Sherin?
Operator
This concludes today’s conference call, you may now disconnect. If you’d like to listen to the telephone replay of the call, it will be available, beginning in approximately two hours and run through February 12 by dialing 855-859-2056 or 404-537-3406 using the Conference ID of 85388364.
The earnings release and an on-line replay of the call will also be available on the Company’s website by visiting Investors Relations area. Thank you very much.