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spk01: Good morning, everyone, and welcome to the National Bank Holdings Corporation 2021 First 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.
spk02: Thank you, Miriyama. Good morning and thank you for joining National Bank Holdings first quarter 2021 earnings call. I'm joined by our Chief Financial Officer, Aldis Berkins. I'm pleased to report quarterly earnings of 86 cents per diluted share and a return of 15.2% on tangible equity. This is particularly noteworthy given our substantial capital position. Credit quality is exceptionally strong with charge-alls at a record low of only one basis point annualized of total loans. Our Paycheck Protection Program has been well managed and has not represented a distraction as we turned our attention to new market share growth. In fact, I am very pleased with what I'm seeing in the pipeline for second quarter with regard to new business development. All this is going to speak to our strong liquidity position, so I'll simply point out that beyond benefiting from stimulus-related account balance increases, we remain very focused on growing new client relationships. And on that note, Aldous, I'll turn the meeting over to you. Thanks, Tim, and good morning, everyone.
spk00: In my remarks, I will present the results for this quarter's financial performance, as well as give an update on our guidance for the rest of 2021. For the first quarter, NBH earned a net income of $26.8 million, or $0.86 of earnings by diluted share, and our return on average tangible assets remained strong at 1.65%. Our strategically built built diverse revenue stream, expense control, and excellent credit trends this quarter resulted in solid shareholder returns with a return on average tangible equity of 15.2%. As we have discussed throughout the pandemic, we had taken very careful approach with regard to credit management and new loan originations. And while we started this quarter with a similar posture, the speed of the COVID vaccination rollout combined with the economic recovery on our footprint have allowed us to begin rebuilding our commercial and small business pipelines. For the first quarter, total loan fundings were $294 million, of which $173 million were non-PPP loans. Furthermore, we finished the quarter on a strong note with March representing the second highest non-PPP loan funding month in the past 12 months. Toll loans outstanding this quarter decreased $50.5 million, but as I previously mentioned, we are gaining momentum and we expect to deliver solid organic loan growth in the second quarter. Turning to deposits, this quarter we added $166.6 million in average transaction deposits. Our non-interest bearing deposits now represent 38.3% of total deposits, and the cost of our total deposits decreased another five basis points this quarter. The strong deposit growth allowed us to increase our average earning asset base by $129.4 million. And given the steepening of the yield curve this quarter, we deployed a portion of the excess funding into the investment portfolio, which grew by $148.2 million. The resulting fully taxable equivalent net interest margin was 3.02%, and the fully taxable equivalent net interest income was $46.5 million. This quarter's net interest income included $2.6 million from PPP loan fees, which was $2.6 million lower than in the fourth quarter, and is the primary reason for the net interest income decrease on the linked quarter basis. The rest of the decrease is due to fewer calendar days this quarter. The remaining unamortized PPP loan fee balance is $6.2 million, and $5.2 million of that relates to PPP 2.0 loans. Additionally, our excess cash position this quarter increased over $600 million, and this excess liquidity had an approximately 32 basis point dilutive impact on our margin calculation. At this time, we expect to maintain a significant portion of cash balances in our balance sheet for most of 2021 to support our organic loan growth. In terms of our asset quality, it remains strong with positive trends. As Tim noted, the first quarter's net charge-offs were just one basis point annualized. Non-accruals decreased 20% on the linked quarter basis and now stand at just $16.4 million. Non-performing assets decreased 12%, and both criticized and classified loans declined on the linked quarter basis. These excellent credit trends, combined with the continuously improving economic forecast projections from Moody's resulted in a CECL model provision release of $3.6 million this quarter. The resulting allowance to toll loans, excluding Paycheck Protection Program loans, at the quarter end was 1.35%. Total first quarter's non-interested income was $33.4 million. This quarter's seasonal decrease in bank card and service charge fees was more than offset by a $1.6 million gain realized on the disposition of several banking center buildings from our previously consolidated locations. Looking ahead for the full year 2021, we are increasing our non-mortgage fee income guidance to $40 to $42 million. With regard to the residential mortgage business, we are off to a good start this year. And while the rise in the long-term rates is impacting both the mortgage volume and margins, the activity has been consistent with our expectations. And at this time, we are reaffirming our full-year mortgage banking revenue guidance of $60 to $80 million. Turning to expenses. Non-interest expense this quarter was $49.7 million, which included a $1.3 million impairment charge related to the banking center consolidations announced during our January earnings call. Excluding this one-time charge, our non-interest expense this quarter was consistent with the prior quarter. The increase in the compensation line on a link quarter basis was driven by slightly high mortgage-related compensation. For full year 2021, we are reaffirming our guidance for non-interest expense to be in the range of $182 to $192 million. And as a reminder, the range provides for the mortgage-related commission adjustments consistent with our fee income guidance. We continue to build capital driven by strong earnings. We finished the quarter with a tangible book value of $23.41 per share. And our CET one ratio was 15.2%. Finally, we have no change in the expected effective tax rate guidance of around 18%. Tim, with that, I will turn it back to you.
spk02: Thank you, Aldis. Look, I believe we're well positioned to deliver excellent results here in 2021. We have strong teams in great markets. We've built a fortress balance sheet and we're well prepared to support both organic and acquisition related growth. We continue to focus on delivering attractive total shareholder returns while maintaining the safety and soundness of our company. And Mariama on that note, I'd like to open up the call for questions.
spk01: As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from Levi Posen with DA Davidson. Your line is open.
spk04: Hey, good morning, Tim, and good morning, Aldis. Hey, good morning. I hear the loan growth outlook going forward is optimistic, but in trying to place attribution on this quarter's runoff, what of that is market demand versus caution on the lending side?
spk02: Well, as you can imagine, we – We believe the market's there. In fact, we know the market's there. We benefit from operating in markets that have largely opened up at this point. The reality is we were holding both feet on the brakes as we entered the first quarter of this year. We actually, as we started to see and get comfortable with the balance sheets of companies coming out of calendar year end 2020, We made the decision to lift our feet off the brakes and our teams are back in the markets. And in fact, if you dissected the first quarter, we saw a very nice ramp up. Aldis can speak to it in detail, but we saw a very nice ramp up in March. And what I'm excited about is the pipeline, the A pipeline, as we refer to it, of new business here in the second quarter. And I actually believe We're going to build through not only the second quarter, but we're going to see that continue to grow as we move through the year. So, you know, furthermore, you know, as we talk about the second quarter, what's been amazing to see is that bank card fee income, another category, has really taken off here in the month of April. I mean, we're excited about the activity we're seeing on that front. We're excited about the activity we're seeing in what we call the business banking or the small business front. So this small and mid-sized business market, particularly given the great markets we operate in, has demand. And again, very strong balance sheets, and that's reflected in some of the best credit metrics that we've ever seen. So we're actually increasingly optimistic about what can be done here in 2021.
spk04: Understood. Okay. Thank you. As you assess your footprint, would you say we're in the later innings of branch closures and maybe that mark, does that have the potential to shift if M&A comes into play?
spk02: Look, it certainly will, you know, always be a consideration in M&A where we're talking about what we naturally focus on, which is acquisitions in our existing footprint. So that's a certainty. What I would tell you is as we go forward on banking center consolidation, and we've really moved out of the closure business now, we think about it as either consolidating into other reasonably convenient locations. And frankly, the biggest driver is you know, watching the continued transition to digital. And as we expand our digital capabilities working through acquisitions or partnerships in the digital arena, I think we've got to keep an open mind to how we serve our client base in that regard. A lot of it's going to be driven by how they want to bank as we go forward.
spk04: Okay. And just one more for me. With some of the fee income guide going up here and the loan growth outlook being attractive going forward, what are your most recent thoughts on the buybacks?
spk02: It's all about target pricing where we think we can create really solid value for all of us who are shareholders. And so we have a price and should the markets lose confidence in financials and should we see our price hit that point, we're going to be a buyer.
spk00: As a reminder, we do have $75 million board-authorized repurchase program in place, so we are standing by should the opportunity present itself.
spk04: Great. Thank you. I'll step back now.
spk02: Great questions. Thank you.
spk01: Your next question comes from Andrew Leash with Piper Sandler. Your line is open. Morning, guys.
spk02: Hey, good morning.
spk03: Hi. Nice to hear the optimism surrounding the loan growth. You know, I'll get to that in a second. But just a clarification on the fee income guidance, the $40 to $42 million. If I look at this quarter and take out the mortgage and the non-recurring gain, that's about $9.4 million. So run rate a little below your guidance range. Beyond bank card fees, where else do you have optimism that you'll see fee income increase?
spk00: Yeah, no, our treasury management service charges are clearly a big focus for us. As Tim mentioned, business banking or small business is acquiring relationships and building on that. So that's a big driver behind there. The one that is somewhat unknown and is dragged if you look at it year-over-year basis is overdraft fees are about 33%, 35% lower than last year. So that's the one that's harder to put your finger on how that will evolve. But
spk02: The really the Treasury management business is what's driving the other service charges and all this won't say that I will landrew the reality is we're always going to slightly under promise and over deliver and all of the categories so, you know, I Think I'm it's comfortable that if you even Work back to some of the other categories that you know, we have a long history of over-performing and what we lay out Got it That's helpful so
spk03: Moving back to loan growth, seems pretty optimistic there. You got it for liquidity to remain elevated or cash levels remain elevated as you hold on to that until loan growth comes back on the balance sheet. So then how should we all roll that together and think about the margin, maybe more PVP fees get recognized this quarter? Do you think it's reached a low point at the 3.2%?
spk00: Yeah, it's hard to put a finger on the percentage calculation given the excess liquidity. So the way we look at it really is taking net interest income and looking at the components, what's driving that, right? And the other component on that that I would back out is the PPP, right? And we identified there's $6.2 million of unamortized PPP fees that will come through our margin. at some point, depending on the forgiveness speed. But if you back out the $2.6 million, we'd be close to $44 million net interest income. And we look with the loan growth returning, that will grow from here on out. We still have some ways to go on deposit cost decreases, on decreasing our interest expense. I think we can reduce that by two basis points on per quarter for the remainder of the year so that there is a benefit under that. As well as the investment portfolio, if you look at our yield there, certainly has been impacted by the lower rate environment to where our portfolio was. But with the backup in rates here, I think we can maintain that portfolio yield at the current levels as well. So from here on out, the net interest income should grow, and then you layer on the timing of that PPP fee recognition.
spk02: It's so basic to what we do, but sitting on this low-cost liquidity with growing optimism of it being able to deploy a lot of that liquidity into loans for our clients, small and mid-sized businesses, supported by the large capital base we have, we get very excited about that match. And I will point out, since Aldis mentioned it, that with regard to PPP, if you look at our stats on PPP 1, Phase 1, we're just at 98% of those loans having been submitted to the SBA for forgiveness, with about 94% of those loans already having been paid. It's remarkable. Of course, our mindset with these programs going in was the faster we could help our clients receive forgiveness, the better the yield on those programs would be. But equally important, it was about moving that administration off of our teams so that we could focus, return our focus to new business development, taking care of existing clients, of course, but taking market share because we're frankly very excited about some of the disruption that occurred over the last year and the opportunity for our teams to to take advantage of it. So I would say the fundamental answer to your question is, look, this is about taking that low cost liquidity coupled with our capital position and redeploying it into new relationship opportunities through lending money.
spk03: You guys have highlighted market share gains as being the the main driver of loan growth going forward. Is that still the case, or is there borrowing opportunities from your existing client base right now?
spk02: Well, Aldus can share the details with you, but it's an important question because, and I think this is probably pretty true industry-wide, but if you look at where we're at on line draws, on the use of lines of credit revolvers, We're running, Alda, if you have the numbers in front of you, we're running at kind of historical lows. Now again, we're looking at these clients and they're sitting there for a number of reasons with a lot of excess cash on their balance sheet, so you would expect that. But the upside, not just for us, but I think for the industry, is that as long as you're holding onto those clients and serving them well, there's gonna be, over time, a nice return to historical averages there, and so that's all upside.
spk00: Right. Andrew, to Tim's point, our line utilization sits at an all-time or historical low of 54 percent. Our typical line draw is between 61, 62 percent. So there is about 62, call it $70 million of upside and loan outstandings if and when those lines get drawn back up. Just in that one small category.
spk03: That's great. Thank you for the color. I'll step back. Thanks.
spk02: Thanks for the questions, Andrew.
spk01: Your next question comes from Andrew Terrell with Stevens. Your line is open.
spk05: Hey, good morning. Hey, good morning. Good morning. Tim, maybe kind of in the same vein of market share takeaway, I was hoping you could share just any success you've had this year on kind of the new hire front, and maybe just discuss, you know, kind of what areas you're focused on hiring in, and just how the overall kind of hiring pipeline is shaping up for 2021.
spk02: The message I would send to any interested teams and bankers is if you're looking for a home, come and talk to us. If you're in the footprints and you've got a track record of performance and want to be well rewarded. We're interested in talking to you, and frankly, if it's a team versus an individual, that's even better. So I hope that message is delivered loud and clear. Look, I do think the reality that we have to grapple with as an industry is that there's going to be a growing war for talent, so to speak. That's an overused phrase, but I think attracting and retaining strong bankers with proven track records in the small and midsize commercial markets in particular, it's going to be a challenge. we're spending more and more of our time developing our own bankers. We think that's important for the culture. We think it's important in terms of creating runway for young bankers and giving them opportunity for growth. But we're certainly more than happy, for example, to talk to teams, talk to bankers, particularly coming out of some of the larger financial institutions is they tend to migrate up in size of company they bank and almost abandon the the you know the lower mid and smaller uh size companies that's a market um we are firmly focused on covering okay um and then just from i guess as you as you kind of lean back into your ease back into the market um
spk05: throughout this year. Just what have you seen so far from kind of a competition perspective from your peers and specifically as it relates to kind of pricing and how that's affecting new origination yields, but also any kind of compromise on structure you're seeing?
spk02: Yeah. I think an advantage we had coming into 2021 is, as you know, we've operated with a very low level of exposure to commercial real estate as a percentage of risk-based capital. And I think early on in this year, you've seen a lot of banks, for various reasons, backing off from that space. And while we're certainly not going to lean into areas like retail or office right now, we have been seeing some pretty interesting opportunities to pick up reasonable returns with very strong guarantors or sponsors in the commercial real estate space a lot of strong equity and you know that's been an area we've we've been willing to increase our exposure and feel good about that but what's also interesting is you know in a lot of this just is a direct result of our bankers getting back out into the marketplace continuing to call on prospective clients you know the reality is we're just seeing traction across a broad set of industries um uh all of our markets um you know all of our markets always believe they can be doing better than they are but uh I just got to say we're fortunate to be operating in very, very good markets that are, for the most part, meaningfully open at this point.
spk05: Okay, great. I appreciate you guys taking my questions.
spk02: Yeah, thank you.
spk01: And 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.
spk02: Well, thank you, Miryama. And I do want to thank those that asked questions. Again, I think it was a very straightforward first quarter. Again, you've noted the optimism we have about not only the second quarter, but the ramp up we see as we move through 2021. So we'll be focused on delivering against that and look forward to talking to you next quarter. 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 May 6th, 2021 by dialing 855-859-2056 or 404-537-3406 and referencing the conference ID of 958-8935. 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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