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National Bank Holdings Corporation (NYSE:NBHC)
Q2 2021 Earnings Call
Jul 27, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone. Welcome to the National Bank Holdings Corporation 2021 Second Quarter Earnings Call. My name is Alan. I'll be your conference operator for today. [Operator Instructions]

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 US 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. Please go ahead, sir.

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

Thank you, Alan. Good morning and thanks for joining National Bank Holdings' second quarter 2021 earnings call. I'm joined by our Chief Financial Officer, Aldis Birkans. With a renewed focus on growing market share, we realized annualized loan growth of 8.4% during the quarter. Equally important, we entered the third quarter with a very strong pipeline of new relationships. We're realizing new relationship growth across our personal, business and commercial banking segments. Credit quality continues to be near pristine and we operate in markets that have largely recovered from the pandemic. As a result, I believe we are very well positioned for strong growth during the second half of the year.

And on that note, Aldis, I'll hand it off to you.

Aldis Birkans -- Chief Financial Officer

All right. Thank you, Tim and good morning, everyone. Thank you for joining our earnings call this quarter. For the second quarter 2021, we reported net earnings of $24.2 million or $0.77 per diluted share. Our return on average tangible assets was 1.41% and our return on average tangible equity was 13.41%. Also earlier in the quarter, we announced a second dividend increase for this calendar year and our quarterly dividend now stands at $0.22 per share.

As we discussed during last quarter's earnings call, we are excited about our loan pipelines and our loan production this quarter did not disappoint. The second quarter's loan fundings were at $362.1 million, which was our second highest non-PPP loan production quarter in history. As a result, we grew our core loan book during the quarter, a solid 8.4% annualized. We continue to be very pleased with the business development efforts of our bankers and our loan pipelines are building nicely across all of our markets. At this time, we project to grow our non-PPP loan book in the mid to high-single digits annualized for the second half of 2021. With regards to the Paycheck Protection Program loans, we had $129.6 million outstanding as of June 30, 2021.

A few extra details on PPP efforts. To date, we have received payments and forgiveness on 99% of this -- of the round one PPP loans, and more than a third of the round two loans have also been forgiven. And at this pace, we expect most of the remaining PPP loan balances to be off our books by the end of this year. The remaining Paycheck Protection Program loan deferred revenue balance is $5 million. And accordingly, we expect most of this fee to be recognized over the next two quarters.

Turning to deposits. This quarter, we continued the strong growth in deposits with average transaction deposits increasing $347.1 million or 28.9% annualized. The second quarter also marked the first time our total average deposits crossed the $6 billion mark. More importantly, the cost of our total deposits decreased another 4 basis points this quarter and it has decreased a total of 9 basis points during 2021. The strong deposit growth benefited our average earning asset base which grew $323.1 million or 20.8% annualized.

The resulting fully taxable equivalent net interest margin was 2.82% in the second quarter and the excess cash we are holding had a 41 basis point dilutive impact on our margin. Given the return of strong loan pipelines in the coming quarters, we expect to start seeing our earning asset mix shift back from cash to higher yielding loan balances. This quarter's fully taxable equivalent net interest income was $46.1 million and included $2 million of PPP loan fees. Stripping out the PPP loan fees, our linked quarter core net interest income grew $200,000. And as our earning asset mix normalizes, we project net interest income to grow in the coming quarters.

Our asset quality remained strong with solid reductions in non-performing, criticized and classified loans from the prior quarter. Net charge-offs for the quarter were just 7 basis points. Our non-performing assets decreased 14% this quarter and are 28% lower than a year ago. Our NPA to total loan ratio excluding PPP loans is now down to 0.46%. These excellent credit trends combined with improving economic forecast projections from Moody's resulted in a CECL model provision release of $5.9 million this quarter. The resulting ACL to total loans excluding PPP was 1.18%.

Lastly, as a reminder, in addition to the allowance for credit losses, we continue to benefit from $8.8 million of fair value discounts from prior acquisitions. Total second quarter's non-interest income was $25.3 million. Our client engagement for both consumer spending and business account activity was strong and we were able to deliver solid growth in our core banking fees.

Total service charges grew 10.9% annualized on a linked quarter basis and 15.3% over the second quarter of 2020, while total bank card revenues grew 53.3% annualized on a linked quarter basis and 26.3% over the second quarter of last year. The other non-interest income line benefited from $800,000 gain this quarter from the sale of [Technical Issues] associated with consolidated banking center consolidations, which compared to $1.5 million of such gains realized during the first quarter 2021.

Looking ahead, for the second half of 2021, we are projecting our non-mortgage fee income to be in the $20 million to $21 million range. With regard to the residential mortgage business, the increase in longer-term rates during the first half of the second quarter impacted both mortgage volume as well as gain on sale margins. Mortgage banking income totaled $14 million this quarter, which was an $8.4 million decrease from the first quarter. The gain on sale margin came in from 3.5 points in the first quarter down to high-2s in the second. This compression explained approximately 40% of this quarter's lower mortgage revenues.

Having said that, we are encouraged to see some margin recovery of 3 points [Phonetic] so far in July. The other contributing factor for the linked quarter revenue drop was the reduced volumes from refinancing activity. Looking ahead, and given the current market conditions, we would project the mortgage-related revenue to be trending in the range of $20 million to $25 million for the second half of 2021.

Turning to expenses. Non-interest expense totaled $46.3 million. On a linked quarter basis, expenses decreased $3.3 million driven by lower mortgage-related commissions and lower banking center consolidation costs. We've also seen a decrease in our occupancy and equipment expense run rate as the banking center consolidation efforts are starting to materialize in these line items. For the second half of 2021, we are projecting non-interest expense to be in the range of $89 million to $91 million.

Finally, our capital ratios remain strong and provide to many options as we consider how to strategically deploy our excess capital in the future. Our tangible book value per share ended the quarter at $24.01 and has grown an 8% annualized for the first half of 2021.

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

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

Thanks, Aldis. Look, we like what we're seeing in our markets and our bankers continue to be well positioned to [Technical Issues]. I believe, we have the potential to realize record levels of new relationship growth in loan production during the second half of this year. On that note, I'll say thanks and ask Alan, ask you to open up the line for questions.

Questions and Answers:

Operator

Certainly, sir. [Operator Instructions] We'll take our first question from Brett Rabatin with the Hovde Group.

Brett Rabatin -- Hovde Group -- Analyst

Hey, good morning, everyone.

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

Hey, good morning, Brett.

Aldis Birkans -- Chief Financial Officer

Good morning.

Brett Rabatin -- Hovde Group -- Analyst

Wanted to first to ask, if I heard correctly, the guidance for the mortgage for the back half of the year was $20 million to $25 million. And if I was right in my notes correctly, it sounded like you were feeling a little better about the gain on sale margin in 3Q maybe versus 2Q. Can you just maybe go back over that and just talk maybe about what you're seeing in the pipeline? And if I got this correct, it sounds like you're expecting mortgage to decrease a little more from 2Q levels despite maybe a little better gain on sale margin?

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

Yeah. I think you heard it right. So $20 million to $25 million, certainly, you have to take into account the Q4 seasonality there that typically takes place although, last year fourth quarter and the first quarter of this year were unusually profitable quarters for the industry. But in terms of the volumes, the big impact that we saw was the refinancing activity that certainly was down on a linked quarter basis almost 50% driven by the higher rate environment and that one, we're not necessarily seeing the recovery just yet. So that while the margins recovering, the volumes are somewhat steady going on from the second quarter into third quarter. Aldis, you may want to speak alternatively to what we've seen in new home financing.

Aldis Birkans -- Chief Financial Officer

Yeah. Certainly, Tim. And, so the good news for us, because we've always focused on, why we have liked taking mortgage business for us has been the attention that our bankers spend on the purchase market. And that market we grew -- linked quarter, we grew 41% of the volume on purchases and 46% over the same quarter last year. So, we certainly see what the activity our markets are providing and opportunity the markets are providing for our market -- bankers.

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

And I think that's the most encouraging point, Brett is that these markets we operate in continue to be very attractive and grow. And so this -- the real challenge is we've discussed before is simply finding the housing, the demand remains strong.

Brett Rabatin -- Hovde Group -- Analyst

Yeah. That's definitely an indication in many markets across the country. The other thing I wanted to just to ask was, you guys were a bit unique this quarter with the strong C&I loan growth. And just wanted to maybe dive a little deeper into that and see if that increased line utilization, new client adds, existing clients doing more things, kind of what's driving that loan growth?

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

Yeah. Great question. I mean the beauty of it is, what we're seeing is market share growth. And when I talk about across the board, I guess in the Olympic -- in the spirit of the Olympic season, I would say, whether it was our badminton teams or our weightlifting teams, they're bringing home medals. And the reality of it is, I feel like we're close to running on all cylinders in that regard. And so, I fully expect to see strong performance in our small business or business banking group through the remainder of the year.

If you look at our combined business banking and commercial banking efforts in the second quarter, as Aldis pointed out, we were just shy of breaking an all-time record in new loan production. And again, we come into the third quarter with pipelines as strong as we've ever seen them. And I think that's to be attributed to a lot of focus on really continuing to touch base with both clients and prospects over the course of the last year. And so, as soon as we took our foot after the break on credit, we started to realize the opportunities that these strong markets bring us.

The other thing I would point out is that we've been hyper-focused in the personal banking arena on new relationship growth. I think it would be very easy for a bank to become complacent, sitting on all of these deposit balances in the consumer arena and not focus on taking market share. And I couldn't be more proud of our team's focus on growing new core relationships in the personal banking space as well, and that's one of the reasons Aldis and I believe that we're going to see really nice stickiness as it relates to this liquidity beyond what might be stimulus-related. So, summarizing all of that, I would say, very solid performance across all of our lines of business.

Brett Rabatin -- Hovde Group -- Analyst

Okay. Great. Appreciate all the color.

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

Hey, you bet. Thanks for the questions.

Operator

Okay. And the next question we'll take will come from Andrew Liesch with Piper Sandler.

Andrew Liesch -- Piper Sandler -- Analyst

Hi, guys. Good morning.

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

Hey, good morning.

Andrew Liesch -- Piper Sandler -- Analyst

Just, kind of just sticking with the loan growth theme here. Tim, you mentioned you think you had record production in the second half of the year. And based on what you just did, that seems reasonable to me. But then the growth guide for non-PPP is mid to high-single digits. I mean what's -- what could keep that from being at that high end? And do you think you could even surpass that growth guidance?

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

I think we have a track record of being somewhat conservative in our guidance. And look, I think we've all learned what the unexpected can bring to the table, but I believe based on where we're at in the markets, we're in that -- there is -- it should be a reasonably strong expectation that we're performing, I'll just say, toward the higher end of that guidance. And then, we're always going to -- sorry, Aldis -- and then obviously, we're going to always strive to beat that. Go ahead, Aldis.

Aldis Birkans -- Chief Financial Officer

Yeah. One just piece of color in terms of what is unknown, and the last several quarters, we've seen quite elevated paydowns, payoffs. So that's part of the -- maybe a hedge in the guidance.

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

And to be clear there, when we talk about paydowns, payoffs, it's not losing relationships. Largely, it's really about an amazing amount of liquidity that resides on our clients' balance sheet. So that's why we've been frankly so hyper-focused on new market share gain. That's where we're going to see the growth. It's literally all about taking care of existing clients and they're about knowing that their borrowing needs will come back to a greater level, but just as important, being hyper-focused on growing market share. And we feel good about where we stand on that front.

Andrew Liesch -- Piper Sandler -- Analyst

Got it. That's helpful. And then just looking at where the reserve ratio stands right here, obviously, it's model-driven, but I mean, what do you think is the right level for you guys to operate? I know there's -- you got the benefit in there from the purchase accounting discount, but where do you see your reserve ratio, like what's most appropriate for you guys?

Aldis Birkans -- Chief Financial Officer

Yeah. I don't know what is most appropriate, because the macroeconomic environment will dictate that. But I can say that the best reference point for us and for CECL model, in a way was when we entered on day one allowance, right, and we entered the 2020 with right around 1% ACL to total loans. So that in my mind is kind of the reference point that where you start with. But certainly, where we go from here will be dictated by the macroeconomic outlook.

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

And if we step away from the CECL model and they're certainly not entirely disconnected but I'll remind you and the other listeners that beyond our own loan review team's stress testing, we do bring in a third party once a year to stress test our loan portfolio at a pretty granular level and look at how that portfolio would perform in the most dire of economic situations. And the work coming out of that analysis continues to suggest that the granularity and diversity of our portfolio is extremely beneficial. Having said that -- and could make the argument for lower than 1%. Having said that, our bias is certainly going to be to hold on to that 1% and frankly, fight for it and again recognizing the -- I guess objectively of CECL. There is always going to be a bit of tension there, I suspect, and that we're going to want to hold on to as much reserve as we can. It's as simple as that.

Operator

All right. So, we will move on to Andrew Terrell with Stephens.

Andrew Terrell -- Stephens -- Analyst

Hey, thanks. Good morning.

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

Hey, good morning.

Andrew Terrell -- Stephens -- Analyst

So maybe on the margin really quickly. I think several months ago we talked about new kind of origination yields in kind of the 4% ballpark. Clearly, the production picture has stepped up since then. Just wanted to get a sense of where kind of blended new production yields were coming on the balance sheet today and then how that compares to what may be rolling off the balance sheet?

Aldis Birkans -- Chief Financial Officer

Yeah, great question. Yeah. Certainly, so the second quarter new loan origination volume for the $362 million production was right at 4%. And if you look at our NIM table and look at the first line item, originated loans, FTE, certainly, there's a benefit of the PPP loan fee acceleration in there. But if you strip out PPP loan benefit, our core originated loan yields were $385 million in fourth quarter of last year, $387 million last -- for the first quarter of this year, and $388 million. So, there was 4% new origination loan yields certainly seem to be accretive and displacing something lower that's rolling off and it is accretive to and rebuilding our originated loan book on accretive basis for the new originations. And keep in mind, that's virtually all of the variable loan book. I mean, we're not taking tenured risks to get those rates which I think is important.

Andrew Terrell -- Stephens -- Analyst

Got it. Okay. Thanks. And then just to make sure I've got the messaging right on kind of liquidity deployment. It sounds like, just given where you think growth is shaping up over the next several quarters, the kind of plan for the excess cash on the balance sheet is just to hold it and maybe deploy into the loan book over the next several quarters or should we expect kind of material securities purchases from here?

Aldis Birkans -- Chief Financial Officer

I don't think you'll see material securities purchases from here again. Last quarter, we added some of the backup in the yield curve, you can see that, but again, it's all highly cash flowing and we're able to stop that and benefit the cash flow or redirect the cash flow in the new loan originations if needed. But nothing material that we're looking to add in the securities. And now that the loan growth is back on table, we expect some of that cash being absorbed and 10 basis point earning assets being displaced with -- as we just talked about with the 4%, that's very powerful benefit to our net interest income growing in the coming quarters. Very powerful math.

Andrew Terrell -- Stephens -- Analyst

Yeah. Thanks for that. And then just if I can sneak one more. And apologies if I missed it, but, were there any share repurchases made during the quarter? And then, I know there is a $75 million authorization out there, is it fair to think with the valuation coming in a little bit over the past quarter, you might be a little more opportunistic on the buyback?

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

Yes. To answer the first part of your question, nothing done in the second quarter, but...

Andrew Terrell -- Stephens -- Analyst

Okay, great. I'll step back. Thank you.

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

You bet. Thank you.

Operator

All right. And your next question will come from the line of Kelly Motta with KBW.

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

Thank you.

Kelly Motta -- KBW -- Analyst

Hi, Tim and Aldis, good morning. Thanks for the question. I just -- I wanted to circle back on loan growth and the market share gains. Just wondering if there is any pattern to where you are getting those gains? if it's the front range or maybe your newer Utah-based expansion? Or if it's more broad-based than that? Just any color around that would be helpful.

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

It really is broad-based. I mean, we feel very good about the momentum we're seeing in all of our geographic markets and our specialty businesses, and feel good about the second quarter and feel very good about what we're seeing in the pipeline across the board. So, I'll remind everyone, I mean these are pretty incredible markets we operate in, whether you're talking about the front range of Colorado, Dallas, Austin, Salt Lake City, Kansas City, I mean, we clearly benefit from operating in markets that have recovered much better [Phonetic] than a lot of the rest of the country. And then our specialty businesses and teams there have really done a stellar job of stepping up and delivering new relationships to the bank. So, I'm really pleased Kelly to report that it's diversified and across the board.

Kelly Motta -- KBW -- Analyst

Great. Now that's -- you certainly have great markets. And then just switching back to expenses, it looks like the guidance and please correct me if I'm wrong, but is sort of more inclined toward the low end of what was last quarter. Is that just related to mortgage -- and coming in a bit this quarter? Or it is really nice to see the benefits of the bridge [Phonetic] pull-through, wondering if there is any kind of changes in better or minus of your expense run rate? Thank you.

Aldis Birkans -- Chief Financial Officer

No. If -- you got, the two main drivers will be the banking center and efficiencies we're gaining there, that's taking now hold and certainly lowering our run rate as well as some of the mortgage commissions, again, talking specifically to the fourth quarter, we do expect some seasonal slowdown there, so that will benefit. So, those are two main ones. And I'll say that we are taking some of the savings that we are realizing, and by the way, if you look that stripped out, the commission-related expenses from last year and this year's full year guidance, we are guiding about $8 million in lower core run rate for full year, this year than last year. So that is the result of all of the cost efficiencies that we've implemented. But we are taking some of the efficiencies and redeploying those into technology to make sure that we're staying up there and that's embedded in the guidance. So that $89 million to $91 million guidance is reflecting all of that.

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

Kelly, what's even more inspiring is that while we're realizing those savings from the brick and mortar consolidations, the teams have done, continue to do an incredible job of retaining the clients in those consolidated locations. And it somewhat ties to Aldis' point on the investment in technology. This trend we're seeing in the industry of converting more and more clients to a digital platform and doing it -- doing so successfully is really encouraging. And we'll continue to look at our strategy around the mix of brick and mortar and digital.

And by the way, I think it's an appropriate time to share with this audience that investors and others should expect to see an even greater commitment to our digital offerings and ecosystems around the small and medium-sized business space. More to come on that front, but we're very excited about where we think we can take this Company and provide alternatives to call it a traditional banking system for small and medium-sized businesses here as we look ahead. But again, what's really, I think critical around your expense question on brick and mortar to say is the fact that we're retaining the revenue while accomplishing that.

Kelly Motta -- KBW -- Analyst

Great. Well, thank you so much both of you for all the color. I will step back now.

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

Thank you, Kelly.

Aldis Birkans -- Chief Financial Officer

Thanks, Kelly.

Operator

Our next question will be from Levi Posen with D.A. Davidson Companies.

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

Good morning, Tim. Good morning, Aldis. I think it was hinted to maybe a little bit earlier, but I was wondering what the timing this quarter of the securities that you did add, when those maybe came on?

Aldis Birkans -- Chief Financial Officer

Yeah. They came on -- actually, this was pretty even purchased throughout the quarter with a little over [Phonetic] heavier lift in April and May, then June for example. A little earlier when the rates really backed up in the early part of the quarter we did take, add on some securities.

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

Okay. And so, is it fair to say that movement in the yield curve, positive movement of it, as it works into your margin calculations would potentially increase your appetite to deploy into both loans and securities?

Aldis Birkans -- Chief Financial Officer

Certainly, would love to deploy all of it in the loans. The securities, again, I think where, we are at $1.3 billion right now. Long-term target for us is about 15% of earning assets being in securities, so we certainly have about if you took our total -- today's earning assets, we're about $300 million over that. So that's where I'm saying I'm not necessarily seeing us increasing that portfolio much more from here.

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

Okay. Great. And then just one last one for me on the capital and the M&A side of things. Now that you've returned to growth and since the confidence in the economic environment is back, any updated thoughts on -- I think a couple of quarters ago, you mentioned there were sort of three types of M&A transactions you guys were considering. Are all three of those still on the table or is that been narrowed down at all?

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

It's an important question. We'll continue to be opportunistic around traditional banking. I will tell you that we've actually looked at a number of opportunities on an exclusive basis. And frankly, have not felt like ultimately they were the right fit for our Company for one reason or another. Where we are hyper-focused is on creating an alternative ecosystem for medium and small business. We think there are a lot of problems for small businesses that can be -- and medium-sized businesses that can be solved using some of the emerging technology that we see out there today. And we believe we understand small and medium-sized businesses as well as any bank in the country regardless of their size. Just given our background and focus as a team, we are very focused on looking at bringing together and working to bring together some very interesting alternatives to traditional banking in that space. So more to come, but I will tell you in the spirit of full transparency, that that's where we are spending a lot of our time and energy, and I hope to be coming back to you soon with more information on that front.

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

Understood. Thank you. I'll step back.

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

You bet.

Operator

And thank you. I'm showing we have no further questions at this time. So I'll 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, Alan. And I want to first thank all of the individuals that asked questions today for your thoughtful questions and time. Thank you all for joining our second quarter earnings call and we look forward to reporting, before we know it, on what we think will be a strong third. So again, thanks, everyone. Have a good day.

Operator

And this will conclude today's conference call. If you'd like to listen to the telephone replay of this call, it will be available in approximately four hours and will run through August 1, 2021 by dialing 888-203-1112 and referencing the passcode 8424776. 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: 33 minutes

Call participants:

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

Aldis Birkans -- Chief Financial Officer

Brett Rabatin -- Hovde Group -- Analyst

Andrew Liesch -- Piper Sandler -- Analyst

Andrew Terrell -- Stephens -- Analyst

Kelly Motta -- KBW -- Analyst

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

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