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spk01: Good morning, everyone, and welcome to the National Bank Holdings Corporation 2020 Third Quarter Earnings Call. My name is Mariama, and I will 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 prepared remarks. 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 but not limited to statements regarding the company's strategy, loans, deposits, capital, net interest income, non-interest income, margins, allowance, taxes, and non-interest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties, and other factors, which 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. In addition, the call today will reference certain non-GAAP measures, which National Bank Holdings Corporation believes provides useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the investor relations section of www.nationalbankholdings.com. It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman, President and CEO, Mr. Tim Laney.
spk04: Thank you, Miryama. Good morning, and thank you for joining National Bank Holdings' third quarter 2020 earnings call. I have with me our Chief Financial Officer, Aldis Berkins, and Rick Newfield, our Chief Risk Management Officer. I'm pleased to share with you that despite pandemic-related challenges, We delivered record earnings during the third quarter on the strength of record-breaking fee income. We continued to maintain a risk-off position on our balance sheet with the goal of being well prepared to address any further economic downturns should they occur. Having said this, we clearly benefit from operating in markets that are performing better than most of the country. The diversity and granularity of our credit portfolio continues to produce solid results with annualized net charge-offs of just four basis points. In fact, we have experienced continued improvement across a broad set of credit metrics during the quarter. While growth in deposit balances has practically been a given during these times, I'm particularly pleased with the growth in new treasury management relationships we've experienced. Finally, we continue to prudently support our clients and communities, and we're proud to have recently been named Colorado's 2020 Job Creation Bank of the Year by the Small Business Administration. And on that note, Rick, I'll hand off the call to you.
spk03: Thank you, Tim, and good morning, everyone. I'll cover three areas in my comments. First, I'll briefly summarize our third quarter credit metrics and performance. Second, I'll discuss the status of our COVID-related modifications. And third, I'll describe the actions we continue to take to reduce risk on our balance sheet while working to prudently support our clients. With respect to our credit metrics, trends held up well during the quarter. I'll note that the asset-quality ratios I'm about to cover exclude the Paycheck Protection Program loans thereby showing a more conservative view of asset quality. While our non-accrual loans decreased during the quarter, a corresponding decrease in loan balances led to our non-accrual ratio remaining flat at .45%. Our criticized loans also decreased during the quarter. Our total non-performing asset ratio improved from .60% at June 30 to .56%, as we not only experienced a decrease in non-accrual loans, but had meaningful reductions in OREO in the quarter. 30-day-plus past dues remained very low at 16 basis points, and net charge-offs for the quarter were only $486,000, or four basis points, annualized. The stable credit trends reflect our conservative underwriting standards and our enhanced loan portfolio management as the pandemic and economic stress continue. As Tim said, I believe being in markets which have generally fared better with the pandemic, as evidenced by unemployment levels lower than national averages, are also favorably impacting our loan book and underlying clients. During the third quarter, loan modifications declined $327 million to $165 million, or 3.9% of our total loans, excluding PPP exposure. It's important to point out that 95% of these modifications still require monthly interest payments versus full payment deferrals. With respect to any second modifications we've extended to clients, those have generally been predicated on receiving cash equity infusions to build reserve accounts, loan pricing considerations, and more restrictive loan covenants. The vast majority of our clients have stabilized revenue and expenses at sufficient levels to cover debt service at contractual levels. In fact, outside of our hotel loans, we have COVID modifications in place for less than 1% of our loans. As a reminder, back in June, we began working with our hotel clients on a conservatively forecasted path to sufficient occupancy and average daily rates to represent restabilization. Based on any operating deficits and ongoing interest-only loan payments, each client was required to infuse additional cash equity and agree to certain additional loan terms. To date, we've successfully negotiated such agreements with the majority of our hotel clients. We benefit from our conservative underwriting of this portfolio and are further protected by an average loan to value of 58%. Given the additional equity infusions and other enhancements to our loan structures, I believe our hotel exposure is well positioned to weather the protracted stress from the pandemic. Tim, myself, and our banking teams continued our intensified portfolio management during the third quarter and are maintaining this robust vigilance currently. To put this effort in perspective, on a weekly basis, we're reviewing all commercial and specialty banking clients and business banking clients with either larger credit exposures or within high-risk sectors. During these reviews, we assess each client's currently weekly revenue versus revenue levels required to cover the client's expenses and full contractual debt payments. We discuss operating status to the extent impacted by pandemic-driven, jurisdiction-mandated restrictions as well as weekly and trailing four-week trends. This enables us to quickly detect credit deterioration and to take action proactively where needed as we continue a risk-off approach to our loan portfolio. Given the pandemic's continuing impacts, it's noteworthy where we have no direct exposure. Aviation, cruise lines, malls, energy services, casinos and gaming, convention centers and hedge funds. We have no dealer floor plan, no indirect auto, no car leasing, and no consumer credit card exposure. I believe maintaining a diverse, granular loan portfolio is a strength. Also, we've conducted twice a year stress tests on our commercial loan book. The most recent of those tests was completed in June by an outside party with a focus on lingering impact and stress from the COVID-19 pandemic and an elongated path to recovery over the coming years. In the most severe scenario modeled, which assumes a weak L-shaped recovery, we remain very well capitalized. Given the risk that commercial real estate, particularly office and retail, will experience further pressure, I'll also point out that non-owner-occupied commercial real estate is only 15% of our total loan portfolio, excluding PPP loans. Furthermore, it is only 85% of our risk-based capital, and what we have is conservatively underwritten relative to loan-to-cost, loan-to-value, and other key metrics. We're well diversified across industry sectors with most industry concentrations at 5% or less of total loans, and all concentration levels remain well below our self-imposed limits. And with that, I'll turn the call over to Aldis.
spk00: Thank you, Rick, and good morning. In my remarks, I will review this quarter's financial performance, which once again highlights the strength and resiliency of our bank. Also during this call, I intend to provide limited guidance for the rest of the year with the recognition that we are still facing a great deal of economic uncertainty. As Tim shared with you, for the third quarter, we reported record quarterly net income of $27.9 million, or $0.90 per diluted share. After adjusting for the previously announced banking center consolidation expense, the third quarter's adjusted EPS was $0.91, or a $0.29 increase from the prior quarter's adjusted results. This quarter's FTE pre-tax pre-provision net revenue totaled a record $37.2 million as we took advantage of favorable mortgage market conditions, which more than upset the headwinds resulting from the zero-rate environment. The third quarter's new loan production reflects our careful approach to evaluating and taking on new credit risk. As we continue to operate in a risk-off mode, the new loan fundings this quarter were $132.9 million which combined with careful client management in regards to credit and yield, resulted in a total loan balance decrease of $226.3 million during the quarter. Moving to deposits, we continue to see strong deposit inflows from both our existing clients as well as newly opened accounts. Our average transaction deposit balances grew a very strong $316.6 million, or 30.3% annualized. Toll deposits grew $306.8 million, or 23.4% annualized, and toll deposit costs decreased seven basis points to 40 basis points this quarter. The continued deposit growth contributed to a solid 12.3% annualized increase in our average earning assets. However, the earning asset mix this quarter moved towards lower yielding cash and investment securities, which resulted in the fully taxable equivalent net interest margin decreasing to 3.21%. We estimate approximately 13 basis points of the contraction this quarter was due to the excess cash balances. And given the lack of attractive investment alternatives, we expect the elevated cash position to remain through at least the end of 2020. Rick already provided a detailed summary of our credit trends, so I will just touch on the provision expense and allowance this quarter. As a reminder, our CECL model incorporates Moody's macroeconomic forecast, and the impact of the forecast changes this quarter did not result in material changes in the allowance requirement. As such, this quarter's provision expense totaled $1.2 million and included coverage for the quarter's net charge-offs of just $486,000 and unfunded loan commitment provision expense of $200,000. We finished the quarter with an ACL to total loan ratio, excluding PPP loans, of 1.45%, factoring in existing loan marks against previously acquired loans. It takes our loan loss coverage to 1.75%. Turning to fees. Our residential mortgage group had another strong quarter with both elevated loan originations and strong gain on sales spreads. During the third quarter, we realized record non-interest income of $44.5 million. which was $5.7 million, or 14.7% higher than the prior quarter. And while we benefited from strong mortgage market activity, I'm also pleased to report that our core banking fees are showing signs of recovery after being significantly impacted by the pandemic-related economic slowdown. Both service charges and bank card fees grew on a linked quarter basis, and the bank card fees this quarter exceeded the prior year's third quarter revenue by 7.6%. With respect to mortgage loan production this quarter, it was another all-time high for the company, with $752 million in loan originations, or an increase of 55% from the same quarter last year. $323 million, or 42.9% of this quarter's production, was in the purchase market, as we continue to benefit from operating in strong local economies. During the quarter, we were also able to maintain elevated gain on sale margins, as both primary and secondary spreads remain wide. Going into the fourth quarter, we expect some of that margin to come down as the purchase lines decline, given the typical seasonal slowdown during the winter months. As we discussed during last quarter's call, we are taking several actions this year to manage expenses, and I'm happy to report that the banking center consolidation efforts announced last quarter are progressing smoothly, and we expect virtually all 12 banking centers to be successfully absorbed within the rest of our network by the end of the fourth quarter. As part of this transition during the quarter, we realized $400,000 in consolidation-related expenses, compared to $1.7 million of such expense in the second quarter. Total non-interest expense this quarter was $55.3 million, or an increase of $1.6 million from the prior quarter. Adjusting for the Banking Center consolidations, the linked quarter expense increase was primarily driven by the variable compensation related to this strong mortgage banking activity. Finally, during the quarter, we once again improved our regulatory capital and liquidity positions. Our CET1 ratio increased 104 basis points to 14.25%, and we grew our tangible book value to $22.40. Our loan-to-deposit ratio improved to 81.1%, and our excess cash position at Goran was approximately $400 million. We believe we are very well positioned to weather any further downturns in the economy. Tim, with this, I will turn it back to you.
spk04: Thank you, Aldous. As Aldous pointed out, we believe that our strong common equity tier one ratio of 14.25% enables the bank to navigate this challenging economy from a position of strength. We remain flexible and opportunistic with a focus on delivering our dividend while growing our tangible book value and delivering a solid return on tangible common equity. Risk management policies and practices are producing desirable results and our residential banking business continues to be an effective hedge against lower yields on the loan book. I'm very proud of my teammates' efforts to support our clients and communities while working to deliver Solid results for our investors. Mariama, we're ready to open up the call for questions.
spk01: Thank you. As a reminder, to ask a question, it is star 1 on your telephone keypad. If you would like to remove yourself from the queue, it is the pound sign. Please hold while we compile the Q&A roster. Your first question comes from Jeff Rulis with DA Davidson. Your line is open.
spk04: Good morning, Jeff.
spk06: Good morning, Tim. Maybe I start with a question for you on the sort of local or just maybe the Colorado footprint. You know, certainly the wildfires and and while those are mostly north of Denver, Also looking at sort of an increase in some of the COVID cases, so potential for a pause on reopening or slowing that. Just those headwinds as you layer it in, obviously a favorable long-term demographic trend out west. But any, if you could assign any impact that you think those pressures might have in over the short run, call it the next several quarters.
spk04: You know, not unlike most states in the United States, we've seen an ebb and flow in terms of rise and fall of COVID rates. And I think your broader observation is what's important. We're seeing on a month-by-month, week-by-week basis a very positive net inflow, not only into Colorado, one of our core markets, but we're seeing the same thing in Utah. We're seeing the same thing in the Dallas and Austin markets where we're operating. So while I'm not ready to speak to where, let's say, COVID infection rates may be reported week to week, what I can tell you is the fundamental positive impact is that we operate in markets that opened up more than certainly the coastal markets in the United States. So we've benefited with a more back-to-business attitude there. At the same time, COVID rates have been manageable, and we're certainly benefiting from this inflow of new residents that continues to be very powerful. Right.
spk06: And as you, Tim, you've taken a pretty cautious approach the last couple quarters in terms of your risk off type commentary. I, as we transition into, into 21, um, you get the sense that, you know, what triggers a risk on, or even just in a risk neutral, um, to, to kind of nudge it towards, um, a more even keeled in terms of the landscape, obviously a lot to play out, but just your thoughts on how growth returns, uh, and kind of what triggers that.
spk04: You know, it's, it's, It's really a great question, and I'm reminded of that answer that someone once gave on some topic where they said, I'm not sure I can explain it, but I'll tell you I'll know it when I see it. And it feels that way. I'll tell you where we're cautious. And it doesn't have much to do with the markets that we do business in, but it's a broader macro question, and that is, If corporate America continues to announce these larger, call it white-collar job layoffs, the question is, what impact does that ultimately have on the economy in 2021? And while we, like most people, want to be very optimistic and celebrate a return to solid growth rates, we're going to be cautious. We feel like that's our job, and we'll continue to protect the balance sheet. Now, here's the good news. Given the markets we're operating in, our bankers are active, our bankers are back out in the market, and we're seeing a nice growth in opportunity. I would just simply say that the filters The added filters we've put in place as it relates to bringing new clients into the bank is greater. And, you know, will that come to a close at the end of the fourth quarter of this year or the end of the first quarter next year? I can't really answer that question today. I think we'll know, all of us, all of us will know more as time goes by here. But very good question, and that's the way we think about it.
spk06: Maybe just the last one for all this, and it's kind of two-part, you know, and maybe not super specific, but I'm trying to mesh the outlook for kind of fee income and expenses, and obviously mortgage has got a lot to do with that. I appreciate your commentary about what you think margins do in the fourth quarter, but, you know, we extend into 21. You've had your branch close. consolidations that have kind of filtered in. I guess the thoughts of what you've done on the expense side, the variable inputs from the mortgage units, you know, I don't know if it's run rate specific. I think you've kind of pulled back guidance of those specifics given the environment. But anything you could point us to on the fee and expense side would be helpful.
spk00: Yep. Yeah, well, I'll start with the expense. Clearly, elevated expense this quarter given the variable compensation component and mortgage. That's, you know, based on the record earnings, we'll take that all day long. We are benefiting very much by the increased spreads in that market as well, so that relationship of the variable compensation on the mortgage to the revenue is a bit disordered in helping our helping our efficiency ratio. If you look at the line items, though, in the table in the earnings release and compare them third quarter of this year versus the third quarter of last year, you'll see that we've been able to hold all other line items except for salaries and benefits in line and check. And that's just continued focus on our expense management to date. on go-forward basis, we'll continue to do that. The 12 banking center consolidation is the prime example and that will benefit as we close these banking centers here, this will consolidate them this quarter, that will benefit, will kick in starting next year. In terms of mortgage compensation and how that fills into that salary expense, I would say, you know, for kind of thinking about, Every dollar of gain on sale that we report, typically that relationship had been about 40% of that would have increased and flown into that salaries benefits line. Given the elevated margins, it's kind of dropped to 30%, so that should give you a little bit of guidance in terms of how we look at that. Now, moving on to fees. Very, very excited about the core banking fees returning to more normalized levels. I think our service charges, our analysis fees are growing. The fee line item that is still underperforming is overdraft fees, but that's understandable given the elevated deposit balances, so we're not too worried about that. Bank card fees showed very strong third quarter and look to continue here in fourth quarter. With regards to mortgage, It's, you know, we certainly benefited from that. It's been a great hedge to our margin. Going into winter months, at least for the fourth quarter, certainly expect certain slowdown here. We're starting to see that here in October already. How much, it's hard to say, but, you know, our guidance is, or kind of guidepost is what NBA says, and they say about 25%, 35% higher volumes this fourth quarter than last. So I think that would be probably a good guide for you on that line item.
spk04: I've just got to come back and say on expenses that we're going to continue to work to realize additional expense reduction in our company. We have a track record for doing that, pandemic or not. That's a focus, and it'll continue to be a focus. And as it relates to our, you know, margin reduction, I still believe we've got room at 40 basis points of cost on deposits to continue to bring our deposit costs down as well, particularly as they continue to grow at the rates we're experiencing.
spk06: Okay, not easy question, so a lot to unpack there. I appreciate it.
spk04: You bet.
spk01: Our next question comes from Andrew Leash with Piper Sandler. Your line is open.
spk04: Hello, Andrew.
spk05: Hey, guys. Hi, good morning. Um, just looking at the mortgage line, if you, if you look at the, where the pipeline stands right now and in the capacity that, uh, you guys have to move it through the pipeline and do the refis and, and approve purchases. I mean, how stressed, uh, are your employees? I mean, are you having to push out and maybe delay some of the production until the first quarter? Just kind of curious, like where this pipeline stands, how busy your folks are and. if we could continue to see big refi volumes going into the next year?
spk04: You know, I believe we will, and not just refi, but to the extent there's product available, just given the influx of new people into the markets we do business in, we're going to continue to see that new homeowner acquisition business. So, To answer your question, candidly, yes, I couldn't be more proud of our teammates in this area. They have been running marathon after marathon, stepping up. Leadership has been strong. Our teammates have just been so focused, in particular, on helping people realize the dream of home ownership. And I think we all get how powerful that is. And, you know, we're certainly, you know, and I'm talking almost more, certainly couldn't be more proud of our mortgage bankers. But when I really look at what our teams are doing behind the scenes to make this work, you couldn't ask for more. We're looking at different ways of rewarding those teammates, recognizing those teammates, and they're strong. They're up for the challenge. And, you know, as the old saying goes, we understand we have to make K while the sun's shining. So that's the mindset.
spk05: Understood. Makes sense. And then on the credit front, obviously good trends there with non-performers and charge ops. And with loans declining, I guess that also kind of supports the lower provision along with this kind of risk-off mentality. But And I know a lot of the provisioning and reserve is also driven by CECL, but do you have any expectations on where the provision can come in until you start to go back to maybe a risk neutral stance?
spk00: I'll start. This is all this. I'll say that, you know, given where the Moody's outlook is, we certainly did not have to record a huge provision expense this quarter. The model actually showed to be adequately reserved, and currently that's very difficult to answer where the future will be. It will be driven by really two points, right? Where the economic development goes and the future outlook for it, because if there is another W type of path, certainly you could see further pressure to build ACL. That's one. And secondly, the loan growth and or mix of the loans will drive that quite a bit too.
spk04: And I would just add, you know, again, when you factor in existing loan marks against previously acquired loans, you know, it does take our loan coverage to 175. Some might argue, given performance of the portfolio, that's high. But I would rather be in a position of maintaining a high level of reserve while we wait to have more of these questions answered around the economy and be in a position where the model was telling us to release later than to do something prematurely. And we're certainly not in any way, shape, or form going to be pressing on the model to try to create early releases. That's just not our game plan.
spk03: And, Andrew, this is Rick. Maybe just quickly I'd add, you know, I've mentioned this a couple times, but, again, because of you've heard our comments about the view of uncertainty in the economy, and that is why we're maintaining the level of diligence around our existing loan book to be proactive. And so I think that in conjunction with, again, you know, what Alda said around the Moody's forecast will have an awful lot to do with where we see CECL.
spk05: Okay. Thanks for taking my questions. I'll step back.
spk04: All right. Thank you, Andrew.
spk01: Your next question comes from Chris McGrady with KBW. Your line is open.
spk04: Good morning.
spk02: Hi. Good morning. This is actually Kelly Mata on for Chris. Hi. I was hoping to ask this question on capital. You obviously built a lot of capital this quarter and kind of in a high cost problem in that it probably will continue to build all else equal. As you look to next year and as the picture becomes clearer, how are you thinking about deploying your strong capital base? And if you could also perhaps comment on M&A and what it would take to get that market kind of up and going again, that would be great.
spk04: You bet. Thank you, Kelly. Well, we certainly didn't expect capital to build at the pace that it's built in a pandemic-challenged year like we've experienced. And to have our tangible book value now at $22.40 a share is, we think, pretty interesting. So, let me try to break it down. First, we fully expect to be able to protect our dividend during these times, and that's a priority. Second, obviously, core to maintaining a strong position in the market, we expect to support our reserves and ensure that we maintain a fortified balance sheet simply to handle any kind of impacts that the market may throw at us. With respect to M&A, we do think in the next 18 months that there could be some really interesting tactical opportunities to fill in within the markets we're in, and we will pursue those when we feel absolutely confident that we can get our hands around the risk in the portfolios that we would be, the credit portfolios that we would be acquiring and have the ability to mark those appropriately. And again, consistent with our history of acquisitions, construct deal win-win transactions where the earn back on any kind of tangible book dilution would be reasonable. Finally, with respect to acquisitions, should we see another dip in bank stock prices, including our own? We have an authorized buyback. We have no issues with regulators allowing us to buy in shares. And I can't think of a better acquisition we could make than of our own shares. if we hit certain prices. And so that's certainly on the table as well as it relates to capital use.
spk02: That was really helpful. Thank you so much.
spk04: Thank you, Kelly.
spk01: Your next question comes from Andrew Leash with Piper Sandler. Your line is open.
spk05: Hey, thanks for taking the follow-up. Just on the if you have any expectations of timing of PPP forgiveness and the fees, the dollar amount of fees that have yet to flow through the margin, please.
spk04: Yeah, I'll start and then hand it off to Rick. It's been interesting. We've heard that there are some banks operating with this mindset of carrying those balances, of maintaining those balances on their balance sheet. I don't know if that's for optical reasons or other reasons, but You know, our approach is to position ourselves to clear as many of those PPP loans off our balance sheet as rapidly as possible with the idea of driving yield or return on those loans as high as possible. Obviously, that means working with our clients. The good news is Rick's in a position to give you some detailed stats on where we're at on all of that. we're feeling good about our progress. So, with that high level, Rick, I'll turn it to you for some details.
spk03: Yeah, sure, Tim. So, Andrew, just maybe a couple additional facts there. So, as Tim said, our banking teams have been working very diligently with our clients to get the applications in and execute on the forgiveness, which ultimately means loading all that into the SBA portal. In terms of where we stand as of end of day last Friday, and this is a daily sort of progress for us, we had We had uploaded a total of $145 million of PPP loans, forgiveness applications. That's about 40% of our total PPP balances. Our focus, just given the potential for changes in the under $150,000 loan processing, has been on the larger loans, and we've processed 61% of those loans greater than $150,000. So some really good progress that we've made over the last several weeks.
spk04: Particularly given that, as I'm sure you know, we've only had the rules for forgiveness laid out here in the last couple of weeks. So we feel like we're off to a solid start.
spk05: Great. That's very good to hear. Thank you. I'll step back.
spk04: All right. Thank you, Andrew.
spk01: Thank you. I'm showing we have no further questions at this time. I will now turn the call back to Mr. Laney for his closing remarks.
spk04: Thank you, Miryama. I will just thank you for your interest and wish you all a good day. Thank you.
spk01: 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 4th, 2020 by dialing 855-859-2056. or 404-537-3406 and referencing the conference ID of 247-1788. The earnings release and an 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.
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