Oct 25, 2013
Executives
Timothy Laney – President and CEO Brian Lilly – CFO Rick Newfield – Chief Risk Officer
Analysts
Paul Miller – FBR Christopher McGratty – Keefe, Bruyette & Woods, Inc. Tim O’Brien – Sandler O’Neill Matt Olney – Stephens Inc.
Gary Tenner – D.A. Davidson & Co.
Tim O’Brien – Sandler O’Neill & Partners, L.P.
Operator
Good morning, everyone, and welcome to the National Bank Holdings Corporation 2013 Third Quarter Earnings Call. My name is Sarah, and I’ll 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 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 these statements.
It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation’s President and CEO, Mr. Tim Laney.
Timothy Laney
Well thank you, Sarah. Good day and thank you for joining National Bank Holdings 2013 third quarter earnings call.
I’m joined today by Brian Lilly, our Chief Financial Officer; and Rick Newfield, our Chief Risk Officer. We are reporting another quarter of increased loan production of continued reduction in our cost of deposits.
And we’re pleased to report that during the third quarter we reached an important milestone with our strong loan originations outpacing our solid resolution of acquired problem loans, allowing us to grow total loans for the first time in the short history of our company. During the quarter we also took actions to increase our focus on core markets and improve our operating efficiency.
We are exiting California and integrating our 32 limited service retirement centers into our full service banking center network across our core markets of Colorado, Kansas, Missouri and Texas. Before turning the call over to Brian I will share with you that we believe we are well positioned to use our excess capital to create long-term value for our shareholders, Brian?
Brian Lilly
Thank you, Tim, and good morning, everyone. We reported net income of $0.9 million in the third quarter, which equaled $0.02 per diluted share.
These results included a $3.4 million one-time charge for the previously announced banking center integrations and exits. Excluding these one-time costs earnings per share would be $0.06 and equals the second quarter.
During the quarter we continued excellent progress growing loan originations, creating value for loan workout efforts, maintaining very good credit quality and taking actions to reduce expenses going forward. Strategic loans grew $103 million or 33% annualized to end the quarter at $1.3 billion, and now comprised 76% of total loans.
The increase was driven by organic loan growth as we had loan originations of $192 million, continuing progress towards our quarterly goal of $250 million. The third quarter originations represent a 40% increase over the second quarter, and a strong 50% increase over the third quarter last year.
The linked quarter growth was led by our commercial bankers with the commercial categories contributing a $137 million of total originations. The progress of our commercial banking associates is noteworthy given the 72% linked quarter growth and the 124% increase over the third quarter last year.
As we shared last quarter we were excited by the pipelines building for our bankers and is rewarding to begin to realize potential. We’re off to a solid start of the fourth quarter with good origination activity.
The credit quality of our strategic portfolio continues to reflect our strong underwriting culture with just 0.8% being classified as non-performing loans. We continue to make steady progress exiting the non-strategic loan portfolio.
These loans decreased to $83 million or 67% annualized to end the quarter at $413 million. A key evidence points in the value pickup from our workout efforts is the quarterly accretable yield gain.
The third quarter added a net $15.1 million in accretable yield transfers in addition to $0.03 million reversal of prior impairment provisions. The cumulative life-to-date accretable yield pickup is now $143 million against impairments of only $25 million.
The net economic impact totals a favorable $118 million and reflects our conservative day one acquisition marks and the excellent results of ongoing workout efforts. It is worth noting that for the first nine months of 2013 a favorable transfer to accretable yield was $50 million.
Given that we still have $426 million in non-accretable difference we expect our workout efforts will continue to provide additional benefits of future earnings. As Tim pointed out we did reach an important milestone this quarter as total loans grew $19.5 million over June 30.
And we’ve shared in the past growing total loans is one key component to reach an inflection point for growth in net interest income. Turning to deposits we also grew average total deposits and client repurchase agreements $29.0 million, or 2.8% annualized.
As average transaction deposits in client repurchase agreements outpaced the declining time deposits. The important category of non-interest bearing checking balances grew 11.7% annualized and the additional commercial clients in positive momentum in our banking centers continued to add relationships.
The mix of transaction deposits to total deposits improved to 61% this quarter, a seven percentage point improvement from September 30, last year. The growth and improved mix lowered the cost of deposits to 40 basis points and represents an improvement of 2 basis points from last quarter.
Net interest income totaled $45.5 million, increasing $1.2 million over the second quarter. Average earnings assets grew slightly but the growth was primarily driven by wider net interest margin attaining 3.8% in the quarter.
During the quarter we received an early pay-off on a sizeable loan which was the last loan in one of our ASC 310-30 loan pools. Their early payoff triggers the immediate recognition of $2.5 million in ASC 310-30 accretable yield as there were no more assets in the pool.
This item added 1.81% to the yield on the total ASC 310-30 loans. And 21 basis points to the 380 net interest margin in the quarter.
Credit quality continues to trend favorably. As you know we believe that it is best to understand our credit quality than the provision for loan losses along the loan portfolios of ASC 310-30 acquired loan pool accounting and all other loans labeled as non 310-30 loans.
With regard to credit quality the ASC 310-30 acquired loan pools I mentioned earlier that we completed the quarterly remeasurement process and picked up a favorable net economic value of $15.1 million during the quarter. This metric helps us cut through the complex accounting and disclosures and so the value being created from these problem asset workouts.
The non 310-30 loans also experienced positive credit quality trends. These loans are primarily comprised of all originated loans as well as acquired non 310-30 loans.
Within these portfolios the non-performing loans ratio improved at 2.31% from 2.63%. Annualized net charge-offs also improved to that kind of level at just 20 basis points.
We ended the quarter with non 301-30 allowance for loan losses of $90.8 million representing 0.8% of these loans with an additional $12.8 million in remaining acquisition marks. Turning to non-interest income and excluding the FDIC-related income, banking related non-interest income totaled $8.7 million and decreased $0.4 million compared to the second quarter.
We had nice growth in our service charge income of $0.3 million it was more than offset by lower OREO income, mortgage gains and some lower, loan recovery income. FDIC-related non-interest income totaled a negative $5.4 million representing a decrease of about $3.6 million versus the second quarter.
The largest component is the negative accretion related to the FDIC indemnification asset which totals a negative $4.2 million, as the continued favorable performance of our covered assets increased the negative accretion $1.2 million versus the second quarter. The other FDIC loss share income decreased $2.4 million driven by lower loss share expenses an increase of $0.5 million in the FDIC clawback liability and the sharing of gains on the sale of OREO assets totaling $1.4 million.
The gross amount of covered OREO gains this quarter was a strong $3.3 million and has netted in the expense line item of other real estate owned expenses. As you know we announced actions with our banking centers to make the delivery system more efficient in the future.
These actions are expected to reduce expenses $2.3 million annually. In addition we have been implementing opportunities to make us more efficient in support and operating functions.
You could see the beginnings of the benefits in lower third quarter expenses for salary and employee benefits of $1.1 million and lower professional fees for example becoming more effective and efficient to the continuous focus and particularly as we set our plans for 2014. OREO and problem loan expenses totaled $1.6 million decreasing $1.8 million from the second quarter the improvement was driven by the larger OREO gains that I mentioned previously.
Capital ratios remains strong with leverage ratio at 18.54% tangible book value per share ended the quarter at $18.60 decreasing $0.16 from the end of the second quarter due to the additional movement in the AFS fair value marks. A tangible book value per share excluding the OCI marks, in other words, excluding the held-to-maturity and AFS investment portfolio, unrealized fair value marks ended the quarter at $18.60, and increased $0.02 per share over the second quarter.
You probably noted in the release that we made a slight modification to the tangible equity calculation. We have tracked the common practice of netting against goodwill that a deferred tax liability resulting from the tax deductibility of goodwill recorded in asset purchase transactions.
Overtime this adjustment will grow to $0.44 for us but at this time the adjustment is just $0.09 to the tangible book value per share. It makes sense to make the adjustment now.
During the quarter we purchased 164,000 of our shares at a weighted average price of $19.84. We have $4.4 million remaining of the $25 million buyback for authorization and will continue to be price opportunistic.
One last comment regarding the tax rate, you may have noticed that the third quarter tax rate calculates to 47% and it’s higher than the 39% that we see as normal. The one-time banking center charged lower pre-tax income and we increased the non-tax deductible warrant expense accrual by $441,000.
Both these factors were to increase the effective tax rate in the quarter. Tim that concludes my comments.
Timothy Laney
Thank you, Brian. Well Sarah we are now ready to take questions.
Operator
(Operator instructions). Your first question comes from Paul Miller with FBR.
Your line is now open.
Paul Miller – FBR
Yeah can you talk a little bit about the, your buyback you had in place. I mean how aggressive or I mean what do you view, your stock price should be and where do you view where the buybacks are accretive or dilutive?
Brian Lilly
Hey Paul this is Brian.
Paul Miller – FBR
Hey Brian.
Brian Lilly
So we’ll start with an 1860 tangible book value and certainly the trading that’s happened in the financial services has moved our stock price up. You saw that most of our action has been in the 18th in our stock buyback.
And we did do a little bit late in the third quarter in the 19s as we looked to get some of that $25 million out there. We’re not look, I think its price opportunistic is the way we look at it at these levels it would be tough to be a buyer.
But as the market has moved and given us opportunities overtime you could see us take advantage of that.
Paul Miller – FBR
Okay and on the loan growth what are some of the areas you’re seeing some decent loan growth and have you been bringing any new management and the lending teams or lending people on board that could drive some of that growth going forward?
Timothy Laney
Hi Paul its Tim. Yeah very good question, we have continued to look at the mix of our commercial banking teams, late second quarter we announced that we had brought on a corporate finance team chiefly focused on asset based lending and they were a solid contributor here in the third quarter as we came into this announcement in the last week or so we announced the recruitment of the team lead.
And the core members of that team to focus on providing senior bank and treasury management services to government municipal entities as well as not for profits. And we fully expect that team to contribute here in the fourth quarter.
And finally we’ve been pleased with the growing production of our journalist relationship managers as well as our specialist in both the agriculture and the energy space.
Paul Miller – FBR
Okay guys, thank you very much.
Timothy Laney
Thank you Paul.
Operator
Your next question comes from Chris McGratty of KBW. Your line is now open.
Christopher McGratty – Keefe, Bruyette & Woods, Inc.
Hi good morning guys.
Timothy Laney
Hi Chris.
Brian Lilly
Good morning Chris.
Christopher McGratty – Keefe, Bruyette & Woods, Inc.
Tim just asking about that question little differently what’s preventing a capital deployment lending the money slower than we expected what’s preventing you from doing tenure offer for some of your shares and can you also help me just on the progress of M&A, your pretty aggressive last quarter?
Timothy Laney
Sure I’ll take your last question first, we continue to believe that we’re in markets and now we’re in markets that are offering up attractive opportunities. I can tell you we’re engaged in, in and around those opportunities.
And as I’ve said before and we think we have a track record around this. We have then and we’re going to be disciplined around diligence and pricing with a focus on creating long-term value for our shareholders as it relates to a tender or buyback I think Brian touching on it.
We’re going to be opportunistic and any buybacks will come with a view toward creating long-term value for our shareholders.
Christopher McGratty – Keefe, Bruyette & Woods, Inc.
Okay, I get it on the size of deals. Can you talk about how you guys are thinking about an MOE type of transaction?
Timothy Laney
Chris, we’re I think my earlier comments pretty much summed up where we’re at.
Christopher McGratty – Keefe, Bruyette & Woods, Inc.
Okay. On the expense story Brian based on the cost savings that you talked about the $2.3 million.
Is that for just a kind of a cost, a run rate of kind of the 46 range near term and I guess can you talk about the ability to leverage it lower?
Brian Lilly
That’s I think the 46 should be high as we, but I looked at it a couple of different pieces there’s kind of our banking operations and there’s our workout efforts and in this particular quarter we have the one-time charge for the banking close. So as we go forward we see progress being made on both sides in the expenses the banking operations as well as the workout efforts and you’ll see that pace down.
On the banking side we’ve had opportunities as we built out the team and we got more efficient and more effective to step back and recognize those. And we’re actively in our 2014 planning now that we’ll set in place further actions that we think will benefit the expense run rate as we go into ‘14.
Christopher McGratty – Keefe, Bruyette & Woods, Inc.
Okay, just one last one on the size of security books going forward, how should we think about that Brian?
Brian Lilly
Well, clearly we built that with the idea that we will be funding loan growth as we go forward. And with the inflection point that we hit this quarter that would be taking place as we move into future quarters.
So the, the book won’t be growing, it’ll be shrinking we don’t see a need to be leveraged enough balance sheet outsized. Hey thank you Chris.
Christopher McGratty – Keefe, Bruyette & Woods, Inc.
Right. Thank you.
Operator
Your next question comes from Tim O’Brien of Sandler O’Neill your line is now open.
Tim O’Brien – Sandler O’Neill
Good morning.
Brian Lilly
Hi Tim.
Timothy Laney
Hi Tim.
Tim O’Brien – Sandler O’Neill
Brian hey could you give some color on the average pricing that you guys were able to secure for the loan production that you guys delivered this quarter?
Brian Lilly
Yeah I’ll be happy to in fact it was a nice pick up because of the more concentration of the commercial, the residence mortgage that we’re booking and what that market is. And so we were able to force slightly in the loan force, force there for the production that we put on this quarter.
And that’s consistent with what our expectations been and what we can do.
Tim O’Brien – Sandler O’Neill
So do you have a, can you quantify a little bit? In terms of is there an average of I guess what was the pricing on C&I?
Were you able to secure anything above prime or were you pricing below prime or kind of where are you in the market?
Brian Lilly
Prime’s one of those measures that there’s not many people that are using as much anymore.
Tim O’Brien – Sandler O’Neill
You guys using LIBOR?
Brian Lilly
Yeah lot of LIBOR based pricing so we’re getting attractive rates that’s in the commercials are in that 4.5 even pus for some of these specially finance deals are getting some real attractive yields there, I can give you some specifics. The consumer products are still in that mid to high threes for the residential mortgages with some little bit more for the non-mortgage products, if that helps you?
Tim O’Brien – Sandler O’Neill
Okay yeah that’s real helpful. And then as far as the FDIC accounting with that $2.5 million paid down on the pooled loan…
Brian Lilly
Right.
Tim O’Brien – Sandler O’Neill
Was there an offset of some sort that was reflected to the fee income or expense line item or expense section of the P&L that would have swung that?
Brian Lilly
Yeah anything that’s covered that it has good news to, you can automatically assume that my [indemnt] asset negative accretion is going to go up. Now they go up at a little bit different pace because I’m advertising that over the remaining loss share life.
Tim O’Brien – Sandler O’Neill
So it wasn’t fully reflected in this quarter skin, all that’s going to be amortized?
Brian Lilly
The accounting gets disconnected in those pieces and that’s why that negative (inaudible) is, it’s there it does burn off and it’s painful as it sits there.
Tim O’Brien – Sandler O’Neill
And then that $424 million number that you mentioned earlier in the call Brian, were meaning accretable difference, is that what you, so what’s the prospect of migrating the rest of that to accretable yield that’s pretty good I guess at this point or?
Brian Lilly
They’re not the full 400, here’s how you should think about that. That’s what we dip into when I reported this quarter that we had a net $15.1 transferred in because of the increased cash flow projections as a resulting from our workout activities, that’s what we dip in to bring in at.
And this year to day as I mentioned $50 million was brought in. Then the 424 and if you think about the accounting was a cumulative cash to be paid on fully paid out, fully interest paid out loans.
Clearly the loans that we bought required and will have significant discounts. Just we’re able to collect more and that’s what we transfer in.
So my only point there was we’ve had continued, several continuous quarters of adding to the yield on our soft balances and with that kind of balance in the workout efforts that we’ve had, we’re looking forward to adding more but it certainly could be of smaller proportions as these quarterly measure that Tim. So I’m not giving out kind of a level of the guidance but certainly we would expect some more.
Tim O’Brien – Sandler O’Neill
So kind of looking out into 2014 suffice to say if the progress in management of those loans continues the way you, it has and the way you would expect and we’ll see diminishing movement to accretable yield there next year?
Brian Lilly
It’s more effective, think about the balance we’ve gone from $2 billion of balances there to now $400 million.
Tim O’Brien – Sandler O’Neill
Sure.
Brian Lilly
And those will keep, that balance keeps getting smaller with these excessive workout efforts.
Rick Newfield
Yeah Tim this is Rick Newfield. So this might be a little just perspective as of 9:30 our specialist team managed $324 million all in.
I don’t have the breakdown of the 310-30 versus non 310-30 but that’s down by about a half from January first. So I think to Brian’s point there’s the pull of those workout loans continues to diminish and I mean that’s going to, it will be reflected in the amount that we can transfer to accretable yield.
With that said as we, as continue to look forward we do see opportunities as Brian mentioned to realize a better cash flows than we currently forecast.
Tim O’Brien – Sandler O’Neill
Thanks for all the color, nice quarter.
Rick Newfield
Thank you.
Brian Lilly
Thanks Tim.
Operator
Your next question comes from Matt Olney of Stephens. Your line is now open.
Brian Lilly
Hi Matt.
Matt Olney – Stephens Inc.
Hey good morning guys. Hey Tim you mentioned the lending teams that you’ve hired in the recent weeks and months.
Can you talk more about your capacity to take on additional teams and if you have seen more holes you want to fill whether it’s by geography or by loan type?
Timothy Laney
Sure we remain committed to operating with approximately 58 commercial bankers and we also remain committed to looking at how we can best optimize these 58 bankers. We look at it to your point, we look at it both geographically and as it relates to specialized business opportunities.
So as we’re planning for 2014 and looking at opportunities, we have banking officers for example in Dallas and Austin like many other banks we continue to see pretty amazing opportunity in those markets and we’ll continue to look for opportunities to redistribute talent into those markets. The same could be said for specialty businesses we’ve been very pleased with how quickly the corporate finance asset based lending team has ramped up.
We’ve also been pleased with the pricing and the relationship business that has been generated here, good example of another opportunity as what I previously mentioned with the government and not for profit banking team. And we, we will continue to look at the performance of each of our relationship managers.
We have set very clear standards around production not only with loans but fee income and other relationship business. And we’ll continue to manage and encourage to ensure we have the best the 58 players in the right fields since covering the right businesses and performing to our expectations.
I covered a lot of ground there I hope that answered your question.
Matt Olney – Stephens Inc.
No. That does Tim and you bring up another point I guess with your comments on tax business.
Where does taxes fit in your overall strategic vision in the next few years for you guys?
Timothy Laney
Well it certainly has proven to be a solid contributor even on a somewhat limited basis where we have offices only in Austin and Dallas. And we would expect it to continue to be a solid contributor that is a market where the bid as spread remains strong as it relates to acquisition.
And so we don’t believe there’ll be M&A opportunity there that would work within our framework for acquisitions. But we certainly enjoyed benefiting from the organic growth that we’re realizing
Matt Olney – Stephens Inc.
Thanks for the color.
Timothy Laney
Thank you.
Operator
Your next question comes from Gary Tenner of DA Davidson. Your line is now open.
Timothy Laney
Good morning Gary.
Gary Tenner – D.A. Davidson & Co.
Good morning, guys. Just a question I guess a follow-up and that’s a little bit I wonder if you could actually talk little bit about the new government nonprofit banking unit maybe talk about some of the competitive dynamics in that segment pricing things along those lines?
Rick Newfield
Right to be clear it’s a no way related to bond financing this is the use of senior bank debt to address a surprisingly significant number of, you might call it niche needs within municipalities. And we think of events that there’s a solid market the team has a very good track record here in the state of Colorado.
And we believe there’s opportunity to expand the leverage that team across our core markets of Missouri, Kansas, Colorado and to a degree even Texas. So it’s about serving those niche needs with senior bank debt it’s also about stepping up our game around serving the treasury management needs of these municipalities as well as pursuing in a right way more not for profit entities that often bring with them again attractive deposits, attractive treasury services but limited financing needs.
Gary Tenner – D.A. Davidson & Co.
And in the government sector what’s the kind of pricing, what kind of loans are you doing there related to cash (inaudible) on bridge loans what kind of financing is it?
Rick Newfield
It is, it would cover a number of pieces which on the shorter end we’ll just fit into our normal commercial that structure but to your point there are yes we looked at the 15 year amortizing loans of some size. And one of the capabilities that we have internally that we were able to address is we’re willing to hedge that on our balance sheet when it makes sense for us, that’s what we’re keenly focused on keeping that rate sensitivity at appropriate level and that moving up on fixed rate longer, longer life loans.
And so it’ll be a mix of all those and we think we got it covered, so we it was very thoughtful process.
Gary Tenner – D.A. Davidson & Co.
Alright, thanks guys.
Rick Newfield
Thanks Gary.
Operator
We have a follow-up question from Tim O’Brien of Sandler O’Neill. Your line is now open.
Tim O’Brien – Sandler O’Neill & Partners, L.P.
Just to stick with that team are talking about cash management treasury products. Who do you see first of all are they going to be doing work in the Kansas City area or is this predominantly a team that’s going to be focused on Colorado.
Timothy Laney
Yeah we absolutely intend to lever the team across all of our core markets which would include which certainly would include Kansas City, Overland Park was set another way Missouri, Kansas, Colorado and to an extent Texas. And we feel good about that and then the question on treasury management again was what Tim?
Tim O’Brien – Sandler O’Neill & Partners, L.P.
Well just so do you have focus in place working on Kansas City selling those products at this point or is that something you’re going to build towards?
Timothy Laney
No, no absolutely we have the team; we have the treasury management team in place not only in bank Midwest but Colorado and Texas.
Tim O’Brien – Sandler O’Neill & Partners, L.P.
Great color and then that second question as far as competition for that business is concerned who is it the money setter banks that have the most robust platforms and capture more of that business or like U.S. bank [can set you] where you going to be pushing the market share flow, who we’re going to be pursuing from?
Timothy Laney
Look we don’t want to make the money sooner banks the big banks mad at us but we believe there’s an underserved market there and niche opportunities that are not being covered based on our experience today. And we’re going to continue to pursue those opportunities.
We have a lot of respect for our competition really not only on at the large bank level but call it the regionals. And then I would have to say at the community bank level there are also some fairly significant gaps where a number of community banks still tend to, it would seem to be very oriented to a loan only business.
And we remain committed to delivering a full range of services.
Tim O’Brien – Sandler O’Neill & Partners, L.P.
Thanks for the color Tim.
Timothy Laney
You bet. Thank you.
Operator
Thank you for your questions. I’ll now turn the call back to Mr.
Laney for closing remarks.
Timothy Laney
Well thank you Sarah. I just want to thank everyone for joining us today in particular thank those of you that asked questions, very good questions this morning.
And we look forward to being with you again soon. Take care.
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 8, 2013, by dialing 855-859-2056 or 404-537-3406 and by pressing the conference ID of 64518392.
The earnings release and then 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.
Timothy Laney
Thank you Sarah.