National Bank - Q1 2024

Transcript

Operator (participant)

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2024 first quarter earnings conference call. My name is Shelley, and I will be your conference operator for today. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to Emily Gooden, Director of Investor Relations. Please go ahead.

Emily Gooden (Director of Investor Relations)

Thank you, Shelley, and good morning. We will begin today's call with prepared remarks followed by a Q&A session. I would like to remind you that this conference call will contain forward-looking statements including, but not limited to, statements regarding the company's strategy, loans, deposits, capital, net interest income, non-interest income, margins, allowance, taxes, and non-interest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties, and other factors, which are disclosed in more detail in the company's most recent filings with the U.S. Securities and Exchange Commission. These statements speak only as of the date of this call, and National Bank Holdings Corporation undertakes no obligation to update or revise these statements. In addition, the call today will reference certain non-GAAP measures, which National Bank Holdings Corporation believes provides useful information for investors.

Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations section of www.nationalbankholdings.com. It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman, President, and CEO, Mr. Tim Laney.

Tim Laney (Chairman, President and CEO)

Thanks, Emily. Good morning, and thank you for joining us as we discuss National Bank Holdings' first quarter results. I'm joined by our Chief Financial Officer, Aldis Birkans. We delivered quarterly earnings of $0.82 per diluted share and a return on tangible common equity of 15.14%. Credit remained strong with 0 basis points of annualized charge-offs. We experienced a slow start with loan production early in the quarter, with business clients deferring action in anticipation of the Federal Reserve lowering interest rates. Once it became clear that rates were not coming down in the near future, client activity picked up, and we have a very strong pipeline for the second quarter. We grew our core deposits 6.8% over the first quarter of 2023 while preserving our low deposit beta across this entire rate cycle.

Expenses were well managed, especially in light of the fact that this year we are incurring over $18 million of expense related to the amortization of our investments to date into 2UniFi. I'll cover a more detailed update on 2UniFi after Aldis takes us through the quarter. Aldis?

Aldis Birkans (CFO)

All right. Thanks, Tim, and good morning. During this call, I will cover the financial highlights for the first quarter as well as touch on our guidance for 2024. Just as a reminder, our guidance does not include any future interest-rate policy changes by the Fed. Turning to the financial results. For the first quarter, we reported net income of $31.4 million or $0.82 per diluted share. The first quarter's return on tangible assets was 1.4%, and the return on tangible equity was 15.1%. During the quarter, our loan balances decreased $130 million or 1.7%. As Tim already discussed, the feedback we have received from our commercial clients is that many projects and funding needs were delayed with the hope of achieving lower funding costs. This was especially evident early in the year when the interest-rate cut expectations were still quite high.

Similarly, our commercial lines of credit utilization ended the quarter at historically low levels. As we entered the second quarter, our pipelines are quite strong, and we expect to meet our full-year loan portfolio growth guidance of mid-single digits. Fully taxable equivalent net interest income for the quarter came in at $85.7 million. The linked quarter decrease was primarily driven by accelerated loan fee income of $2.9 million recognized in Q4 and one less day in the first quarter. Net interest margin in the first quarter was 3.78%. Our new loan originations during the quarter were at an average rate of 8.8% and continued to favorably benefit our earning asset yields. Our overall deposit beta this rate cycle to date is 37.5%, and the pressure on deposit pricing is abating. Looking ahead for the rest of 2024, we project our NIM to settle in the mid-37s.

Deposit balances during the quarter grew $327 million on a spot basis and $90 million on an average balance basis. This quarter, we benefited from seasonal tax inflows in the Cambr platform deposits. As such, we paid off all of our FHLB borrowings as these deposits are more favorable to our funding costs. In terms of our asset quality, it remained strong. During the quarter, we incurred 0 basis points in net charge-offs and recorded no provision expense. We increased our overall allowance-to-total loan ratio to 1.29% and have built sufficient reserves to support any nonperforming loans. Additionally, we still hold $26.2 million in marks against our acquired loan portfolio, which equates to approximately 35 basis points of loan loss coverage if applied across the whole loan portfolio. Total non-interest income for the first quarter was a strong $17.7 million or a $1.6 million increase from the prior quarter.

And while we saw a seasonal slowdown in service charges and bank card fees, we are gaining momentum from our fee diversification efforts driven by SBA loan gains on sale, trust income, and Cambr fees. This quarter, we also benefited from a $600,000 gain on the sale of a banking center building. For the rest of 2024, we project to meet our full-year guidance for the fee income of $67 million-$72 million. Non-interest expense for the quarter totaled $62.8 million and included elevated payroll taxes. T&E-related expense this quarter was approximately $3 million, and we continue to be on budget and on plan without targeted rollout dates. Looking ahead for the rest of 2024, we see our non-interest expenses trending towards our original full-year guidance of $253 million-$258 million.

In terms of capital, we continue to grow our excess capital with a TCE ratio ending the quarter at 9.2% and a Tier 1 leverage ratio coming in at 10%. Tangible book value per share grew 2.4% ending the quarter at $23.32. Tim, I'll turn back to you.

Tim Laney (Chairman, President and CEO)

Thanks, Aldis. Well, solid earnings resulted in tangible book value per share increasing $0.55 during the quarter, and our Common Equity Tier 1 capital ratio totaled 12.35% at quarter end. Now, turning to 2UniFi, we remain highly enthusiastic about the progress being made in the build-out of a banking platform that we believe can change the way small and medium-sized businesses access U.S. banking. Additionally, we're building tools within 2UniFi for these businesses that simply do not exist today. We believe 2UniFi will save business owners time and money and meaningfully reduce stress in their lives. All project work is tracking to target, and we expect to be in release one user testing by the fourth quarter of this year. Shelley, on that note, let's open up the call for questions and discussion.

Operator (participant)

Thank you. And if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for a brief moment to allow everyone an opportunity to signal for questions. And our first question is coming from Jeff Rulis with D.A. Davidson. Your line is open.

Aldis Birkans (CFO)

Good morning.

Jeff Rulis (Managing Director)

Good morning. I guess on the influx of deposits from Cambr and the related paydown of FHLB, I guess there's no expectation that those flow out. It sounded tax-related, but just wanted to kind of get a sense for the stickiness of those staying on balance sheet.

Aldis Birkans (CFO)

Yeah. This is Aldis. Jeff, hey, good morning. Obviously, we've looked at their seasonal patterns in the years before and do expect some of this to come out in the rest of the April and coming months here in second quarter. But there is certainly a certain level that will be sticky as well.

Tim Laney (Chairman, President and CEO)

The growing average balances across that platform is pretty impressive. So we expect that trend to continue.

Jeff Rulis (Managing Director)

Got it. Okay. And then kind of turning to the margin then, got the mid-370 guide. I guess given that a pretty big FHLB drop-off, if you look at kind of average interest-bearing rates there, would you think about in a building loan pipeline, I guess looking more towards the back half of the year, where do you lean in terms of direction of margin? Sounds like some pretty good tailwinds to that. Just wanted to kind of check in on kind of full-year expectations.

Aldis Birkans (CFO)

Yeah. I mean, I think it's hard to give quarter to quarter. There might be fluctuations, as you mentioned, given where Cambr or DDAs flow certainly will come down to the timing of the loan growth as well as, as I mentioned, we are adding loans at high 8%. That is margin accretive regardless how you fund it. So timing of that will matter too. So there is certainly we set up for tailwinds for margin to maybe shift up in Q4, but don't want to get ahead of our expectations here either.

Jeff Rulis (Managing Director)

On the related front, on the NII, I think you had a guide last quarter. Are you kind of at this point kind of reassessing, or should we think about that level or maybe the margin coming in? Any thoughts on the NII levels, and can those, I guess, recover before maybe the margin rebounds?

Aldis Birkans (CFO)

Yeah. Well, I think certainly, again, the earning asset NII will be driven by earning asset growth. That's driven by loan growth. The first quarter certainly came in a bit lower than we expected given the lighter loan performance. So whether we make that up in going in the rest of the year is hard to tell towards the full NII guidance. But again, if you look at the loan growth from here, what does that do to earning asset growth, holding margin to mid-37s, it will give you a pretty good estimate for the NII.

Tim Laney (Chairman, President and CEO)

I would add that the current pipeline would suggest that by quarter end, if our teams deliver like I think they can, that we'll be back on plan as it relates to loan balances and then working hard to cover any NII gap from the first quarter.

Jeff Rulis (Managing Director)

Got it. Okay. Thank you. I'll step back.

Aldis Birkans (CFO)

Yes. Thanks.

Operator (participant)

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

Kelly Motta (Managing Director)

Hey.

Aldis Birkans (CFO)

Hi, Kelly.

Kelly Motta (Managing Director)

Thanks for the question. I apologize. I dropped off for a minute or two during the prepared remarks, and you just alluded to the loan pipeline. I was just wondering if you could share where you're seeing the best opportunities. I appreciate the color on where new loan yields are coming on. Just any sort of color as to how pipelines are shaping up now versus this time last quarter and the mix of that pipeline.

Tim Laney (Chairman, President and CEO)

Yeah. It's largely C&I. So middle-market businesses across our geography, we're seeing nice buildup in all of our major markets. And it probably is important to point out that part of what was going on in the first quarter is, in addition to line usage being down, which frankly, we're still analyzing that, talking to clients, trying to understand the drivers there, we were also selectively pruning the loan portfolio. So there are targeted industries where we are proactively reducing exposure. And so you can imagine an area like transportation that represents about 3% of our total book where we're actually reducing that exposure just given the state of that industry. So we're certainly not adding new clients in that space. So core manufacturing is strong. Service-related businesses are strong.

I can't really speak to a lot of activity in commercial real estate because that's just not a focus in this market. So Kelly, I hope that helps with a little color.

Kelly Motta (Managing Director)

Yeah, certainly. That's very helpful. And maybe I love the color that 2UniFi. You have version one ready for testing in Q4. I know it's going to take some time for that to really shine through results. But as we start to think about what this platform could do, are you thinking about this as more of a fee opportunity? Will it add to balance sheet growth? Just wondering kind of how to frame the type of impact it could have to NBHC, even if we're not ready to quantify that yet.

Tim Laney (Chairman, President and CEO)

Yeah. Strategically, it's a great question. Strategically, I would tell you that we should think about 2UniFi as building a completely new business, not just a fee income generator, not a product, but a new business, a new way of banking. For our investors, we'll preserve the optionality to run the core bank and run 2UniFi. But there very well could be a time where the reality is that 2UniFi becomes such a force in that it's doing business in such a different way that it moves out and lives its own life. I've got to say the beauty of building it in conjunction with the rest of the bank is we are already seeing really interesting technical crossover that is benefiting and will benefit the bank in terms of better client experience, saving us money.

Probably the most important example in this environment is just the level of security features that are being built into 2UniFi that are largely transferable over to the core bank. Then everybody is talking about artificial intelligence and so on and so forth. What I would suggest is that AI is only as good as its data sources. I couldn't be more impressed with the data lakes that our teams are building. In terms of functionality, this is an API-first architecture. The beauty of being able to adjust with that flexibility is unlike anything you really find in the vast majority of the banking industry today. It will allow us to be more nimble and responsive to clients and, again, do business in ways that haven't previously been done.

Kelly Motta (Managing Director)

Awesome. Thank you so much for the color, Tim. I will step back.

Aldis Birkans (CFO)

All right. Thanks, Kelly.

Operator (participant)

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

Aldis Birkans (CFO)

Good morning.

Andrew Liesch (Senior Equity Research Analyst)

Morning, guys. Thanks for taking the questions. Just a question on the Cambr deposits that came in in the quarter. I was curious what the funding difference might be between those and the FHLB borrowings that you paid off.

Aldis Birkans (CFO)

Yeah. Again, we don't necessarily talk to specific pricing, but I'll just say that if these deposit balances persisted at the same cost versus what we paid FHLB, it would be the difference a $2 million benefit annualized to our bottom line.

Andrew Liesch (Senior Equity Research Analyst)

Got it. All right. That's helpful. And then, Tim, what's the thought process on additional M&A right now? How are conversations with prospective targets going? The Cambr deal last year, the other deals, not too far in the distant past. But just curious on your outlook for additional M&A right now.

Tim Laney (Chairman, President and CEO)

Well, activity has certainly been high. We have been clear in what we're targeting, which would be institutions in that $1 billion-$3 billion range in growth markets, ideally in growth markets that we know and understand. That's where we've been spending our time.

Andrew Liesch (Senior Equity Research Analyst)

Got it. All right. Thanks for taking the questions. I'll step back.

Aldis Birkans (CFO)

You bet. Thanks.

Operator (participant)

Our next question is coming from Jeff Rulis with D.A. Davidson.

Jeff Rulis (Managing Director)

Thanks. I was hoping to get a little more color on the flows of non-performing loans linked quarter, what kind of came in and the characteristics of those loans?

Tim Laney (Chairman, President and CEO)

Yeah. Thanks for asking because I do want to make the point that we don't believe this increase in NPAs over the quarter represents anything like a negative trend. In fact, we believe NPAs will be down below 50 basis points by year-end. There were just a couple of, I'll call them, stagnant non-performers that our special assets group has not moved out of the bank as quickly as, quite frankly, we expected. They are receiving an intense amount of focus. I'll also point out that we believe that these NPAs are very well preserved for, and no concern on that front.

Jeff Rulis (Managing Director)

That's 1% of loans, Tim, the 50 basis points?

Tim Laney (Chairman, President and CEO)

Yes. Yes.

Jeff Rulis (Managing Director)

Okay. Great. And then one more follow-up. You touched on it briefly, but the service and card revenues linked quarter down. The card makes some sense. But just wanted to see what was potentially that had been kind of a hard-charging line item and just wanted to see within those two, if there were any changes or seasonality impacts that hope to see those come back.

Aldis Birkans (CFO)

Yeah. First quarter is all seasonality for us for both of those line items. So yeah, at least we.

Tim Laney (Chairman, President and CEO)

I suspect if you've compared first quarter last year to first quarter this year, you would see that dip. We've seen it for years.

Aldis Birkans (CFO)

Right. So we do expect that to come back here in the second quarter and already seeing good activity in bank card starting month of March into here in April.

Tim Laney (Chairman, President and CEO)

It prompts another thought we should share because a lot of our card activity relates to personal banking relationships. Another encouraging point around deposits is we started to see a nice positive movement in personal banking deposits as we closed out the quarter and moved into the second. That was certainly refreshing to see. That will contribute to additional fee income over time as well.

Jeff Rulis (Managing Director)

I guess while we're in the weeds, the mortgage banking had a nice sequential uptick. I don't know if you want to update sort of the outlook for the year in that line item.

Aldis Birkans (CFO)

Not specifically. Again, it's embedded in our full-year guidance. But I'll say that as markets changed, right? Even this morning, the rates are up quite a bit given the GDP numbers. But I would say that what we guided, what we embedded in our plan for gain on sale for mortgage business has been somewhat conservative. It's been at or better each month this year to our plan numbers. And again, if the market doesn't really change that dramatically, we should be able to meet our plan numbers in that line item.

Jeff Rulis (Managing Director)

Yeah. The full-year non-interest income guy is great. So appreciate it.

Tim Laney (Chairman, President and CEO)

Yeah. Of course. Thank you.

Operator (participant)

Our next question is coming from Kelly Motta with KBW.

Kelly Motta (Managing Director)

Hey. Thank you so much for letting me jump back into the queue. I appreciate the color on M&A and understanding that maybe you want to keep some dry powder for that as well as some of the other initiatives you're working on. I did see that capital did build very nicely. You guys have been active on the buyback in the past. Just wondering how you guys are approaching that method of capital deployment.

Tim Laney (Chairman, President and CEO)

We're probably discussing buyback action at as high a frequency as I can recall. We do believe there could be some interesting opportunity there. We have an authorized buyback. And we'll watch the market and pull the trigger if we think we're in the right place. I'll also point out that with the kind of capital growth that we're realizing, it gives us confidence that we will continue to increase our dividend twice each year. And we're also, frankly, talking about whether or not a higher dividend at this point might be appropriate. So that's another consideration.

Kelly Motta (Managing Director)

Awesome. Thanks so much for the color. Good to hear. I will step back.

Aldis Birkans (CFO)

Thanks for the question.

Operator (participant)

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.

Tim Laney (Chairman, President and CEO)

Thank you, Shelley. I'll just thank those of you that asked thoughtful questions and wish you all a good day. Thank you.

Operator (participant)

This concludes today's conference call. If you would like to listen to the telephone replay of this call, it will be available in approximately 24 hours. The link will be on the company's website on the investor relations page. Thank you very much and have a great day. You may now disconnect.