National Bank Holdings Corporation (NBHC) Q1 2021 Earnings Call Transcript

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National Bank Holdings Corporation (NBHC -2.18%)
Q1 2021 Earnings Call
Apr 23, 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 2021 First Quarter Earnings Call. My name is Mariama, and I will be your conference operator for today. [Operator Instructions] 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, noninterest income, margins, allowance, taxes and noninterest 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.

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

Thank you, Mariama. Good morning, and thank you for joining National Bank Holdings First Quarter 2021 Earnings Call. I'm joined by our Chief Financial Officer, Aldis Birkans. I'm pleased to report quarterly earnings of $0.86 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-offs at a record low of only one basis point annualized of total loans.

Our Pay Check 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, Aldis, I'll turn the meeting over to you.

Aldis Birkans -- Chief Financial Officer

Thanks, Tim, and good morning, everyone. 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 turned net income of $26.8 million or $0.86 of earnings per diluted share, and our return on average tangible assets remained strong at 1.65%. Our strategically 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 a very careful approach with regard to credit management and new loan originations. And what 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. The 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 noninterest-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-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. Nonaccruals decreased 20% on a linked-quarter basis and now just -- stand at just $16.4 million.

Nonperforming assets decreased 12% and both criticized and classified loans declined on a linked-quarter basis. These excellent credit trends, combined with a 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 total loans, excluding Paycheck Protection Program loans at the quarter end was 1.35%.

Total first quarter's noninterest 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 million 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 million to $80 million. Turning to expenses.

Noninterest 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 onetime charge, our noninterest expense this quarter was consistent with the prior quarter. The increase in the compensation line on a linked-quarter basis was driven by slightly higher mortgage-related compensation. For full year 2021, we are reaffirming our guidance for noninterest expense to be in the range of $182 million to $192 million.

And as a reminder, the veins 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 CET1 ratio was 15.2%. Finally, we had no change in the expected effective tax rate guidance of around 18%.

Tim, with that, I will turn it back to you.

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

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.

Questions and Answers:

Operator

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

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

Hi. Good morning, Tim and good morning, Aldis.

Aldis Birkans -- Chief Financial Officer

Good morning.

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

I hear the loan growth outlook going forward is optimistic. But in trying to place attribution on this quarter's one-off, what of that is market demand versus caution on the lending side?

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

Well, as you can imagine, we -- the market -- we believe the market is there. In fact, we benefit -- 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 in 2020, we made the decision to lift those -- 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 furthermore, 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.

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

Understood. Okay. Thank you. And 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?

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

Look, it certainly will always be a consideration in the 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 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 is going to be driven by what -- how they want to bank as we go forward.

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

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 buyback?

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

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.

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

Okay.

Aldis Birkans -- Chief Financial Officer

As a reminder, we do have $75 million of board authorized repurchase program in place. So we are standing by should the opportunity present itself.

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

Great. Thank you. I'll step back now.

Aldis Birkans -- Chief Financial Officer

Great questions, thank you.

Operator

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

Andrew Liesch -- Piper Sandler -- Analyst

Good morning guys.

Aldis Birkans -- Chief Financial Officer

Hi. Good morning.

Andrew Liesch -- Piper Sandler -- Analyst

Hi. Nice to hear the optimism surrounding the loan growth, I'll get to that in a second. So, just clarification on the fee income guidance of $40 million to $42 million, If I look at this quarter and take out the mortgage and non-recurring gain, that's about $9.4 million. So run rate, a little below your guidance range. Beyond bank currencies, where else do you have optimism that you see fee income increase?

Aldis Birkans -- Chief Financial Officer

Yeah. No, the -- our treasury management service charge is clearly a big focus for us. As Tim mentioned, business banking for small business is acquiring relationships and building on that. So that's a big driver behind there. The one that is somewhat unknown. And then, as a drag, if you look at it on a year-over-year basis, is of that fees 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 the -- really, the treasury management business is what's driving the other service charges.

Andrew Liesch -- Piper Sandler -- Analyst

Got it.

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

And all this on saying that I will, Andrew, the reality is, we're always going to, slightly under promise and over-deliver in all of the categories. So, I think, it's comfortable that it even work back to some of the other categories that we have a long history of over performing and what we layout.

Andrew Liesch -- Piper Sandler -- Analyst

Got it. That's helpful. So, moving back to loan growth seems pretty optimistic there. You guided for liquidity to remain elevated or cash levels to remain elevated as you hold on to that until loan growth comes back on the balance sheet. So then, how should we roll that together and think about the margin, maybe more PPP fees get recognized this quarter? And do you think it's reached a low point at the 3.2%?

Aldis Birkans -- Chief Financial Officer

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 if you -- the other component on that, that we would -- I would back out as big PPP, right?

Then 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, it'd be close to $44 million net interest income. And we look -- the loan growth returning, that will grow from here and out.

We still have some ways to go on deposit cost decreases, decreasing our interest expense. I think we can reduce that by two basis points on per quarter for the remainder of the year. So there is a benefit into 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 and out, net interest income should grow, and then you layer on the timing of the PPP fee recognition.

Andrew Liesch -- Piper Sandler -- Analyst

Got it.

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

It's so basic to what we do. But sitting on this low-cost liquidity with growing optimism of being able to deploy a lot of that liquidity into loans for our clients. Small and midsized businesses, supported by the large capital base we have. We're very excited about that math. And I will point out since Aldis mentioned 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 team so that we could focus get -- 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 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.

Andrew Liesch -- Piper Sandler -- Analyst

Got it. You guys have highlighted market share gains as being the main driver of loan growth going forward. Is that still the case? Or is there -- or is there borrowing opportunities from your existing clients base now as of now?

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

Well, all of us can share the details with you, but it's an important question because -- and I think this is probably pretty true industrywide. But if you look at where we're at on line draws, on the use of lines of credit revolvers, we're running -- all of you have the numbers in front of you. We're running that 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 there's -- as long as you're holding on to those clients and serving them well, there's just going to be, over time, a nice return to historical averages there. And so that's all upside.

Aldis Birkans -- Chief Financial Officer

Right, Andrew, to Tim's point, our line utilization sits at all-time historical low, 54%. Our typical line draw is between 61%, 62%. And so there is about $60 million to, call it, $70 million of upside in loan outstanding if and when those drop those lines get drawn back up.

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

Just in that one small category.

Andrew Liesch -- Piper Sandler -- Analyst

That's great. Thank you for the color. I'll step back. Thanks.

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

Thanks for the questions, Andrew.

Operator

Your next question comes from Andrew Terrell with Stephens. Your line is open.

Andrew Terrell -- Stephens -- Analyst

Hey good morning.

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

Good morning.

Andrew Terrell -- Stephens -- Analyst

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 in kind of the new hire front? And then maybe just discuss kind of what areas you're focused on hiring in and just how the overall kind of hiring pipeline is shaping up for 2021?

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

Yes. I the message I would send to any interesting -- 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 as 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 midsized commercial markets, in particular, is -- it's going to be a challenge. And so we're spending more and more of our time developing our own bankers. We think that's important for the culture.

I 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 as they tend to migrate up in size of company they bank and almost abandon the lower mid- and smaller-sized companies. That's a market we are firmly focused on covering.

Andrew Terrell -- Stephens -- Analyst

Okay. And then just from, I guess, as you kind of lean back into your -- ease back into the market 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 the kind of pricing and how that's affecting the origination yields, but also any kind of compromise on structure you're seeing?

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

Yes. I think an advantage we had coming into 2021, 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 that's been an area we've been willing to increase our exposure and feel good about that.

But what's also interesting is, and a lot of this just is a direct result of our bankers getting back out into the marketplace, continuing to call on prospective clients. The reality is we're just seeing traction across a broad set of industries, all of our markets always believe they can be doing better than they are. But I've 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.

Andrew Terrell -- Stephens -- Analyst

Okay. Great. I appreciate you guys taking my question.

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

Thank you.

Operator

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.

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

Well, thank you, Mariama. And I do want to thank those that ask 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.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

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

Aldis Birkans -- Chief Financial Officer

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

Andrew Liesch -- Piper Sandler -- Analyst

Andrew Terrell -- Stephens -- Analyst

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