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. 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 to introduce National Bank Holdings Corporation's Chairman, President and CEO, Mr. Tim Laney. Please go ahead, sir.
Thank you, Alan. Good morning and thanks for joining National Bank Holdings' Q2 2021 earnings call. I'm joined by our Chief Financial Officer, Aldis Birkins. With a renewed focus on growing market share, we realized annualized loan growth of 8.4% during the quarter. Equally important, we entered the Q3 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.
Thank you, Tim, and good morning, everyone. Thank you for joining our earnings call this quarter. For the Q2 2021, we reported net earnings of $24,200,000 or $0.77 per diluted share. Our return on average tangible assets was 1.41 percent and our return on average tangible equity was 13.41 percent. Also early 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 2nd quarter's loan fundings were $362,100,000 which was our 2nd 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 PDP loan book in the mid to high single digits annualized for the second half of twenty twenty one.
With regards to the Patient Protection Program loans, we had $129,600,000 outstanding as of June 30, 2021. A few extra details on PPP efforts. To date, we have received payments and forgiveness on 99% of the round 1 PPP loans and more than a third of the round 2 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 Patriot Protection Program loan deferred revenue balance is $5,000,000 and accordingly, we expect most of this fee to be recognized over the next two quarters.
Turning to deposits. This quarter, we continued strong growth in deposits with average transaction deposits increasing $347,100,000 or 28.9 percent annualized. The Q2 also marked the first time our total average deposits crossed the $6,000,000,000 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 $323,100,000 or 20.8 percent annualized.
The resulting fully taxable equivalent net interest margin was 2.82 percent in the 2nd 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 high yielding loan balances. This quarter's fully taxable equivalent net interest income was $46,100,000 and included $2,000,000 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 remains 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 release resulted in a CECL model provision release of $5,900,000 this quarter. The resulting ACL to toll loans excluding PPP was 1.18%.
Lastly, as a reminder, in addition to the allowance for credit losses, we continue to benefit from $8,800,000 of fair value discounts from prior acquisitions. Total second quarter's non interest income was $25,300,000 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 Q2 of 2020, while total bank card revenues grew 53.3% annualized on a linked quarter basis and 26.3 percent over the Q2 of last year. The other non interest income line benefited from $800,000 gain this quarter from the sale of real estate associated with consolidated bank incentive consolidations, which compared to $1,500,000 of such gains realized during the Q1 of 2021. Looking ahead, for the second half of twenty twenty one, we are projecting our non mortgage fee income to be in the $20,000,000 to $21,000,000 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 $1,000,000 this quarter, which was an $8,400,000 decrease from the Q1. The gain on sale margin came in from 3.5 points in the 1st quarter down to high 2s in a 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 about 3 points so far in July.
The other contributing factor for the linked quarter revenue drop was 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 $20,000,000 to $25,000,000 for the second half of twenty twenty one. Turning to expenses. Non interest expense totaled $46,300,000 On a linked quarter basis, expenses decreased $3,300,000 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 on these line items.
For the second half of twenty twenty one, we are projecting non interest expense to be in the range of $89,000,000 to $91,000,000 Finally, our capital ratios remain strong and provide to our 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 on 8% annualized for first half of twenty twenty one.
Tim, with that, I will turn it back to you. Thanks, Aldis. Look, we like what we're seeing in our markets and our bankers continue to be well positioned to take market share. 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.
Certainly,
you. We'll take our first question from Brett Rabatin with the Hovde Group.
Hey, good morning, everyone.
Hey, good morning, Brett. Good morning.
I wanted
to first ask, if I heard correctly, the guidance for the mortgage for the back half of the year is $20,000,000 to $25,000,000 And if I was writing down 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 awards to decrease a little more from 2Q levels despite maybe a little better gain on sale margin?
Yes. You heard it right. So $20,000,000 to $25,000,000 certainly you have to take into account the Q4 seasonality there that typically takes place, although last year, Q4 Q1 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 linked quarter basis, almost 50%, driven by the higher rate environment. And that one, we're not necessarily seeing the recovery just yet.
So the volume margins are recovering, the volumes are somewhat steady going on from Q2 into Q3. I'll assume you
may want to speak alternatively to what we've seen in new home financing.
Yes. No, certainly, Tim. And so the good news for us is and we've always focused on and why we'd like the mortgage business for us has been the investment that our bankers spend on the purchase markets and that market we do linked quarter, we grew 41% of volume on purchases and 46% over the same quarter last year. So we certainly see what
the activity these are markets are providing and opportunities with the markets are providing for our market bankers. 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.
Yes, that's definitely the case in many markets across the country.
The other thing I wanted just
to ask was you guys are a bit unique this quarter with the strong C and I loan growth. Just wanted to maybe dive a little deeper into that and see if that's increased volume utilization, new client adds, existing clients doing more things, what's driving that?
Yes. 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 Q3 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 off the brake 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.
Okay.
Great. Appreciate all the color.
You bet. Thanks for the questions.
Okay. And the next question we'll take will come from Andrew Liesch with Piper Sandler.
Hey, guys. Good morning. Just sticking with the loan growth team here. You mentioned you think you have record production in the second half of the year. Based on what you just did, that seems reasonable to me.
But then the growth guide for non PDP is mid to high single digit. I mean, what could keep that from being at that high end? And do you think you could even surpass that growth guidance?
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 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. And one just piece of color in terms of what is unknown in the last several quarters have we've seen quite elevated paydowns, payoffs. So that's part of the maybe a hedge in the guidance.
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 their 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.
Got it. That's helpful. And then just looking at where the reserve ratio stands right here, Obviously, it's model driven. But 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?
Yes. I don't know what is most appropriate because of the macroeconomic environment will dictate that. But I can say that the best reference point for us on for CECL model anyway was when we entered on day 1 allowance, right, and we entered the 2020 with right around 1% ACL for 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. 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 stress testing, we do bring in a 3rd 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, objectivity of CECL, there's 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.
All right. So we'll move on to Andrew Terrell with Stephens.
Hey, thanks. Good morning.
Hey, good morning.
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 want 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's maybe rolling off the balance sheet?
Yes, great question.
Yes, certainly. So the 2nd quarter new loan origination volume for that $362,000,000 production was right at 4%. And if you look at our NIM table and look at the first line item originated loans, FTDE, 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 3.85 in Q4 of last year, 3.87% last or Q1 of this year and 3.88%. So those 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 with the new originations.
And keep in mind, that's virtually all of variable loan book. I mean, we're not we're not taking tenured risk to get those rates, which I think is important.
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?
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 be able to stop that and benefit the cash flow or the cash flow or redirect the cash flow on the new loan originations if needed. But nothing material that you're looking to add in the securities and now that loan growth is back on table, do expect some of that cash being absorbed and 10 basis point earning asset being displaced with the, as we just talked about, with the 4%. That's a powerful benefit to our net interest income growing in the coming quarters.
Very powerful math.
Okay. Thanks for that. And then just if I can seek one more and apologies if I missed it, but were there any share repurchases made during the quarter? And then I know there's a $75,000,000 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?
Yes. To answer the first part of your question, nothing is done in the second quarter, but
Okay, great. I'll step back. Thank you.
You bet. Thank you.
All right. And your next question will come from the line of Kelly Motta with KBW.
Thank you.
Hi, Jim and Alvis. Good morning. Thanks for the question. I just I wanted to circle back on loan growth and the market share gains. I was just wondering if there's any pattern to where you're 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.
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 felt good about the Q2 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 faster 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.
Great. That's certainly a great market. And then just switching back to expenses. It seems like the guidance, and please correct me if I'm wrong, but it's sort of more inclined towards the low end of what was last quarter. Is that just related to mortgage and coming in a bit this quarter?
Or it's really nice to see the benefits of the branch plans pull through. Wondering if there's any kind of changes in better or minus of your expense on, right?
Thank you. Yes.
No, you got the 2 main drivers will be the bank incentive and efficiencies beginning 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 Q4, we do expect some seasonal slowdown there. So that will benefit. So those are 2 main ones. I'll say that we are taking some of the savings that we are realizing.
And by the way, if you looked at stripped out the commission related expenses from last year and this year's full year guidance, we are guiding about $8,000,000 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 $89,000,000 to $91,000,000 guidance is reflecting all of that. 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 saves is the fact that we're retaining the revenue while accomplishing that.
Great. Well, thank you so much both of you for all the color. I will step back now.
Thank you, Kelly. Thanks, Kelly.
All right.
And our next question will be from Levi Posen with D. A. Davidson Companies.
Good morning, Tim. Good morning, Elvis.
I think it was hinted too 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?
Yes, they came on. Actually, this was pretty even purchased throughout the quarter with a little heavier lift in April May than June, for example. So a little earlier when the rates have really backed up in the early part of the quarter, we did take out on some securities.
Okay. And
so is it fair to say that movement in the yield curve, positive movement as it works into your margin calculations would potentially increase your appetite to deploy into both loans and securities?
Certainly, we would love to deploy all of that in the loans. The securities, again, I think where we are $1,300,000,000 right now, long term target for us is about 15% of earning assets being in securities. So we certainly have about if you took out today's earning assets, we are about $300,000,000 over that. So that's where I'm saying I'm not necessarily seeing us increasing that portfolio much more from here.
Okay, great. And then just one last one for me on the capital and the M and A side of things. Now that you've returned to growth and it seems 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 3 types of M and A transactions you guys were considering. Are all 3 of those still on the table? Or has that been narrowed down at all?
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 and 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 in medium sized businesses that can be solved using some of the emerging technology and 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 hope to be coming back to you soon with more information on that front.
Understood. Thank you. I'll step back.
You bet.
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.
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 Q2 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.
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 4 hours and will run through August 1, 2021, by dialing 888-203-eleven 12 and referencing the passcode 8,424,776.