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National Bank Holdings Corporation (NYSE:NBHC)
Q4 2020 Earnings Call
Jan 22, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning everyone and welcome to the National Bank Holdings Corporation 2020 Fourth 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 and 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 provide 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.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Thank you, Mariama. Good morning and thanks for joining National Bank Holdings fourth quarter and full year 2020 earnings call. I have with me our Chief Financial Officer, Aldis Birkans and Rick Newfield, our Chief Risk Management Officer. I'm pleased to report record full year earnings of $2.85 per share, growing tangible book $2.20 during the year to $23.09 per share. In the face of unprecedented pandemic related challenges, my teammates came together to serve our clients and communities all while taking care of each other. We continue to benefit from having strong banking teams operating in high performing U.S. markets. We believe our relationship banking model coupled with a disciplined focus on building a diverse and granular loan portfolio bodes well for our future.

Now under CECL, we build approximately $17.6 million in additional provision for loan losses during 2020 while realizing actual net charge-offs of just $2.7 million or only 6 basis points of total loans. We actively supported our client engagement in the Paycheck Protection Program and to date, we helped over 75% of our participating clients engage in the forgiveness process. Before turning the call over to Rick, I want to thank my teammates for their intense focus on realizing solid growth while at the same time prudently examining every opportunity to increase our productivity. Rick?

Richard U. Newfield -- Chief Risk Management Officer

Yeah, thank you, Tim and good morning everyone. I'll cover two areas in my comments. First, I'll briefly summarize our asset quality trends during 2020. Second, I'll describe the actions we continue to take to reduce risk on our balance sheet and position our company to navigate sustained economic uncertainty while working to prudently support our clients. Despite the unique challenges presented by the COVID-19 pandemic, our asset quality remained strong during 2020. This is demonstrated by our ability to reduce non-performing assets 13.5% during the year with a non-performing asset ratio of 0.60% at December 31, 2020. Furthermore, as Tim shared in his comments, we accomplished this while only incurring 6 basis points of net charge-offs for the year. I'll also note that we ended 2020 with only 3 basis points of past dues 30 days or greater, the lowest level in our company's history.

These credit trends reflect the conservative underwriting standards we've maintained since our company's formation as well as the enhanced loan portfolio management we implemented in March. I believe being in markets which have generally fared better with the pandemic as evidenced by unemployment levels lower than national averages is also favorably impacting our loan book in underlying clients. Tim, myself and our banking teams continued our intensified portfolio management through the year and are maintaining this robust vigilance currently. This enables us to quickly detect credit deterioration and take action proactively where needed. The bottom line is our strong credit metrics and loan portfolio monitoring have positioned us very well as we've entered 2021. I'll now turn the call over to Aldis.

Aldis Birkans -- Chief Financial OfficerChief Financial Officer

Thank you, Rick and good morning. In my comments, I will provide an update on our financial results and give guidance for 2021. For the fourth quarter, we reported $0.87 of earnings per diluted share and we finished 2020 with another year of record annual earnings of $2.85 per diluted share. When adjusted for this year's banking center consolidation expense, the full year EPS was a record $2.91. The fourth quarter's loan production was $272.5 million, which was double that of the loan production in the third quarter and a 1.1% increase from the loan production during the same quarter 2019. Total loans outstanding this quarter decreased by $202.4 million and $172.2 million of that decrease was driven by our successful Paycheck Protection Program loan forgiveness efforts.

As of December 31, we had received forgiveness proceeds on 50% [Phonetic] of the original outstanding PPP balances. Depending on the SBA's process and timing, we expect the majority of the remaining balances for the loans made in 2020 to be forgiven during the first half of this year. We are seeing a solid economic recovery in our markets, but at this point, even with a COVID vaccine being rolled out, we feel it is too early to provide any forward-looking loan growth guidance.

The solid deposit growth trends from the summer continued into the fourth quarter as our average fourth quarter transaction deposits grew $172.1 million on a linked quarter basis or 15.3% annualized. The total cost of deposits decreased 7 basis points to 33 basis points and our transaction deposit cost decreased 3 basis points to just 15 basis points in the fourth quarter 2020. The resulting fully taxable equivalent net interest margin was 3.24% in the quarter and the fully taxable equivalent net interest income was $49.8 million. This quarter's net interest income included $5.2 million from Paycheck Protection Program fee recognition as compared to $1.5 million in the third quarter.

In terms of net interest margin, this equates to a benefit of approximately 25 basis points. The remaining unamortized PPP balance is $3.4 million and as I mentioned before, we expect the majority of those loans to clear our balance sheet during the first half of 2021. Additionally, we continue to hold approximately $500 million in excess liquidity, which has a roughly 27 basis point dilutive impact on the margin calculation. The downward pressure on our margin from the excess liquidity will likely carry into 2021 and as of right now, we do not expect to deploy the excess cash into investment securities.

Rick provided a detailed summary of our credit trends, so I'll just touch on the allowance. The ACL to total loans excluding PPP as of year-end was 1.43%. In addition to the ACL, we have $11 million in loan marks against the acquired portfolio. These loan marks continue to accrete through net interest income and they also provide for additional protection from credit loss in that portfolio. During the quarter, we had no provision expense. The CECL model benefited from improvements in the current and forecasted economic conditions, but that benefit was fully offset by our conservative stance on the qualitative factors.

Total non-interest income for the quarter was $33.4 million or a 64% increase from the same quarter last year. We continue to be very pleased with our revenue diversification and how the mortgage business provides a natural hedge to the margin headwinds. I'm also pleased to report that with the exception of overdraft fees, deposit related service charges and bank card activity returned to pre-crisis levels during the fourth quarter. In 2021, we expect to build on the fourth quarter's non-mortgage related banking fee income trends and project our non-interest income excluding mortgage gains to be in the range of $39 million to $41 million.

In terms of the mortgage business, the volumes should remain robust for the foreseeable future, but are expected to decrease relative to the record levels we saw in 2020. We also expect that the lower mortgage volumes will likely reduce the very strong gain on sale margins that we are currently enjoying. Based on how these trends play out, we could see mortgage related revenues for 2021 somewhere in the range of $60 million to $80 million.

Total non-interest expense this quarter was $48.4 million or a decrease of $6.9 million from the prior quarter. The linked quarter decrease was primarily driven by lower mortgage banking related compensation. In addition, during the quarter, we also began realizing expense savings related to the recently completed banking center consolidations. To further our operating leverage initiatives, we are moving ahead with seven additional banking center consolidations in 2021. Once completed, this will bring our total banking center network down by 22% as compared to the third quarter 2019 when we began these initiatives.

As a result, we project 2021 non-interest expense to be in the range of $182 million to $192 million. The wider range provides for the mortgage related commission adjustments, consistent with our fee income guidance. Finally, we expect the 2021 effective tax rate to be around 18% excluding the FTE adjustment on interest income and we expect fully diluted shares outstanding to remain around 31 million shares. Tim, with that, I will turn it back to you.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Thank you, Aldis, covering a lot of ground there. We believe our strong capital and liquidity levels enable our bank to operate from a position of strength. Our risk management policies and practices continued to produce desirable results. To that end, yesterday, our Board moved ahead of schedule to approve another increase in our quarterly dividend. We believe we're well positioned to consistently deliver a solid dividend while growing our tangible book value and delivering an attractive total shareholder return. And on that point, Mariama, I'll ask you to open up the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from Levi Posen with D.A. Davidson. Your line is open.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Good morning.

Levi Posen -- D.A. Davidson -- Analyst

Hey, good morning, Tim, Aldis, and Rick, this is Levi on for Jeff Rulis.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Great, Levi.

Levi Posen -- D.A. Davidson -- Analyst

Thinking about your loan growth appetite and granular loan book, can you explain [Phonetic] philosophy about returning to growth and does that happen across the loan book at the same time or are there segments that you may turn on sooner than others?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Right, so I think it is important to note that in the fourth quarter of last year we saw a return to our historical levels of loan production and that is an indication that we have opened our doors so to speak. I think your question is good as it relates to segments that we might be more careful with. Those that are obvious are certain real estate sectors that we really had little to no exposure to in the first place, but you're talking about areas like retail and office and again, we're fortunate that those just aren't areas we had much exposure to.

Now, alternatively, we've always operated with a relatively low level of commercial real estate exposure in general and we believe there are going to be some meaningful opportunities for growth in certain sectors as we look ahead. No better example would be real estate in the logistics space supporting -- we're spending time with clients and prospective clients really looking at how we might better support the movement of product and goods -- shipping of products and goods through warehousing and that related real estate. We're seeing strong performance in a lot of our specialized industry groups.

It's quite remarkable how well the quick service restaurant space has performed through this pandemic and I think some of the silver lining is what we're seeing is some new operating practices that are making for example that industry or a lot of players in that industry more profitable than ever before, trimming their expenses, managing their operating leverage and we like what we're seeing in terms of opportunities with the right operators in that space.

We also like on a geographic basis, frankly the opportunity of continuing to play hard into the small and mid-sized business commercial arena. We've seen where some of the larger institutions in the country have either shied away from serving certain elements of that market or have chosen to do it with one -- try to do it with 1-800 numbers and we don't think that's effective for serving middle market commercial business and we're more than happy to run with our relationship model in that space. So Levi, I think I've given you two or three examples of where we see opportunity and I would tell you that we're optimistic.

I mean the reality of it is across the board, the markets we operate in are performing more strongly than the national average on almost every economic metric you could look at. We're fortunate that our markets have been more open than not through -- on a relative basis through this pandemic and our clients are increasingly optimistic. So our posture, as many of you know, has historically been to be conservative in our guidance, but then work very hard to over-deliver. I would tell you that's exactly where we stand as we enter 2021, conservatively postured, but very optimistic.

Levi Posen -- D.A. Davidson -- Analyst

Thanks, Tim. That's helpful and then just one on capital, can you give some color on your mindset related to the buybacks?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yeah, it's interesting. Given our view on the strength of our prospective future earnings and this continued growth in our tangible book value, we're having to adjust [Phonetic] the target number up quite a bit in terms of where we see value in buying our shares back and Aldis is continually sharing with me that target increase and so I'm going to tell you buybacks are not off the table and we would certainly to the extent that we are fortunate enough to engage in call it some fill in M&A over the course of this year that it might very well be done in conjunction with some buyback.

We've built this fortress level of capital and the good news is while maintaining this very high level of capital, we've been able to still deliver attractive returns on tangible common equity, but it also gives us the optionality to look more seriously at buybacks at this point and frankly continue to pursue the right merger partners. Levi, I probably went beyond your question there, but I hope that helps.

Levi Posen -- D.A. Davidson -- Analyst

Yeah, absolutely. Appreciate it. That's it from me. I'll step back.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

All right, thank you.

Operator

Your next question comes from Kelly Motta with KBW. Your line is open.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Hi, Kelly.

Kelly Motta -- KBW -- Analyst

Hey, Tim, Aldis, and Rick. Thanks for the question. I think I'll continue on and roll with the M&A topic that we left off on. I'm just wondering, it seems like the M&A conversations have picked up quite a bit as things have gotten a little bit more certain economically. Just wondering if there is kind of any change in the outlook now versus the last quarter and kind of your view on the pulse of the M&A market as we look to 2021?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yeah, I'll share with you and our investors the posture and the position I've been sharing with our Board and I believe it's appropriate at this point to be looking at acquisitions really on two fronts. And the first, I would describe as current market opportunities where the synergies just make all the sense in the world, probably more in that $1 billion range, but where we know we could create through partnerships great value for those institutions and certainly create great value for our investors and so, those may sound a bit more tactical, but extraordinarily important and we've had a fine history of being able to deliver strong returns for everybody involved out of those kind of actions.

The other I would describe as more transformational and that's where we look at opportunities that would meaningfully significantly improve our profitability and opportunities to leverage greater scale and frankly there is even a third we've talked about. We continue to look at some really interesting opportunities to leverage some of our capital into the digital space and that's both in the payments arena, in the security arena, leveraging our very strong treasury management capabilities and that's something that we'll continue to work on as part of our strategic vision. So I would say market opportunities, transformational opportunities, and then investment in opportunities to really redefine parts of our business in the digital space.

Kelly Motta -- KBW -- Analyst

Great, that's great color. Thanks, Tim. Maybe just turning to expenses. In the past, you've given kind of the expenses related to mortgage. During the quarter I know they had been running with a better efficiency ratios of higher gain on sale the past couple of quarters. Just wondering what the expense contribution was in mortgage this quarter to kind of back the core bank versus mortgage operations?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yeah, I'll turn it to Aldis for the detailed answer to that question, but I do want to compliment you. I noticed in your first look, you picked up on what's happening with our focus on operating leverage and what I'm most excited about is once Aldis answers the question around stripping out that kind of mortgage run rate is what we're doing in our core run rate and I want to point out that we -- that a lot of the attribution for that reduction in core run rate is always talked about as being related to the banking center consolidation.

On that note, I would say what's really exciting is that our digital conversion rate in that process is stronger than we expected and more important, our retention rates of clients in that consolidation process has out run even our highest expectations, but here's the real point there, while we tend to attribute a lot of that expense savings to the consolidations -- I have to give my teammates across the entire company credit because we're looking at opportunities every day to improve all of our processes and throughout the bank to bring core expenses down and our teams have done a great job there and continue to look at opportunities to be more efficient.

So I'm going to take your question as an opportunity to thank my team for their focus on productivity and just make the point that we're going to continue to see efficiency gains coming out of more than the banking center consolidations. Now Aldis, you can finally answer Kelly's question.

Aldis Birkans -- Chief Financial OfficerChief Financial Officer

Thanks, Kelly. Hi, good morning. Actually to further Tim's point in our guidance of $182 million to $192 million, embedded in there in terms of the core efficiency is about $8 million improvement in run rate from 2020 into 2021. That kind of strips out all of the mortgage commissions in there. Now specifically to your question, you're right, the mortgage has been running at an efficiency that's better than long-term averages that we've seen and the industry has seen. The fourth quarter typically it is around -- in our mortgage business, salaries and benefits embedded in there is mortgage commission around 35% to call it 40%. In the fourth quarter, it was around 30%. So it gives you a bit of a guidance in terms of how efficient that business has been.

Kelly Motta -- KBW -- Analyst

That's really helpful. Thanks a lot, I'll step back now.

Aldis Birkans -- Chief Financial OfficerChief Financial Officer

Yeah and I'm sorry, I just want to correct one thing in terms of the percentage that I gave, that percentage to gain on sale, so the commission running as a percentage of gain on sale, not percentage to salaries and benefits.

Kelly Motta -- KBW -- Analyst

Got it, thanks.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Thank you, Kelly.

Operator

Your next question comes from Andrew Liesch with Piper Sandler. Your line is open.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Good morning, Andrew.

Michael Hultquist -- Piper Sandler -- Analyst

Hey, it's actually Michael Hultquist on for Andrew.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Michael.

Michael Hultquist -- Piper Sandler -- Analyst

Kind of following up on expenses here, looking into this quarter, how much should that line item rise due to seasonal higher payroll taxes and bonus accruals?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

[Speech Overlap]. It shouldn't rise at all on bonus accruals, I mean --

Aldis Birkans -- Chief Financial OfficerChief Financial Officer

Right, I mean we're accruing -- for 2020 bonus has been accrued fully in 2020. So there is no increase on that. There is a payroll impact certainly in the first quarter that is somewhat offset retention [Phonetic] that it's somewhat offset by a fewer days -- business days in the quarter. So I would say there is not necessarily meaningful impact or difference between the quarters from bonus or payroll impact.

Michael Hultquist -- Piper Sandler -- Analyst

Okay, that's helpful. And then switching gears here, liquidity is certainly going to be the wild card as with many of the peers, but have you seen any deposit trends so far this quarter that would suggest less excess liquidity going forward and maybe continued margin expansion?

Aldis Birkans -- Chief Financial OfficerChief Financial Officer

No, I think encouragingly we've seen quite the opposite. Deposits have continued to build and I'll view that as a positive in building our core franchise and in building the liquidity, it just pre-funds that loan growth that we talked about and really that becomes very accretive to both margin and net interest income because the loans have been pre-funded.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Not only growing, but growing while we've eliminated a number of interest bearing deposit products, seeing very solid retention in our core operating accounts and seen great traction -- this isn't talked about enough, seen tremendous traction in our treasury management arena and the growth with business relationships and seen a lot of that business come from larger institutions and that's a trend that we're really excited about.

Michael Hultquist -- Piper Sandler -- Analyst

Okay, that's terrific. Thank you for taking my questions. I'll step back.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Of course, Michael, thank you.

Operator

And your next question comes from Kelly Motta with KBW. Your line is open.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Kelly.

Kelly Motta -- KBW -- Analyst

Hey, sorry to hammer with the expense question, but just want to make sure I got the moving parts of my model right. With this seven banking center consolidations that you have upcoming, how should I be thinking about kind of the cadence of those expense saves coming in. When will they be completed?

Aldis Birkans -- Chief Financial OfficerChief Financial Officer

We don't expect to get them -- get it completed until the end of the second quarter. So really the $2.2 million expense save that we referenced in the press release on consolidation is expected to start take place in the second half of this year.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yeah, important question.

Kelly Motta -- KBW -- Analyst

Got it.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yeah, no, thank you for asking. That's an important clarification.

Kelly Motta -- KBW -- Analyst

And then just a minor housekeeping thing just with the tax rate, is this kind of like 18%, 19% a good approximation for next year to go with?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

It is, it is.

Kelly Motta -- KBW -- Analyst

Thank you.

Operator

Thank you. I am showing we have no further questions at this time. I will now turn the call back to Mr. Laney for his closing remarks.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

All right, thank you, Mariama. I'll just thank everyone for joining. Hope everyone continues to stay safe and we appreciate your support. 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 February 4th, 2021 by dialing 855-859-2056 or 404-537-3406 and referencing the conference ID of 4472264. 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.

Duration: 30 minutes

Call participants:

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Richard U. Newfield -- Chief Risk Management Officer

Aldis Birkans -- Chief Financial OfficerChief Financial Officer

Levi Posen -- D.A. Davidson -- Analyst

Kelly Motta -- KBW -- Analyst

Michael Hultquist -- Piper Sandler -- Analyst

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