National Bank - Q2 2023
July 19, 2023
Transcript
Operator (participant)
Good morning, everyone, and welcome to the National Bank Holdings Corporation 2023 2Q earnings call. My name is Anna, and I will be your conference operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session following the prepared remarks. As a reminder, this conference is being recorded for replay purposes. I would like to remind you that this conference call will contain forward-looking statements, including but not limited to, statements regarding the company's strategy, loans, deposits, capital, net interest income, non-interest income, margins, allowance, taxes, and non-interest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, 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, 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 Chief Executive Officer, Mr. Tim Laney. Please go ahead, sir.
Tim Laney (Chairman, President, and CEO)
Thank you, Anna. Good morning, and welcome to National Bank Holdings second quarter 2023 earnings call. I'm joined by Aldis Birkans, our Chief Financial Officer. We delivered solid earnings for the quarter, representing a year-to-date increase of $34.1 million or 88% over prior year same period earnings. Our core earnings engine remains strong and adjusting for the impact of investment valuations met our expectations. Our credit quality is excellent, and our core deposits grew 29% annualized during the second quarter. With a Common Equity Tier 1 ratio of 11.08% and ample liquidity, we continue to serve as a source of strength in our markets. On that note, I'll turn the call over to Aldis. Aldis?
Aldis Birkans (CFO)
All right. Well, thank you, Tim, and good morning. Thank you for joining our earnings call this quarter. For the second quarter 2023, we reported net earnings of $32.6 million, or $0.85 per diluted share. The closing and integration of the Cambr acquisition has gone extremely well. It already is contributing nicely to our financial results, with core deposits growing $539 million this quarter, or 29% annualized. On a year-over-year basis, we have grown our quarterly pre-provision net revenue by $14.5 million, or 49%, driven by strong organic balance sheet growth, well-executed acquisitions, and as always, strong discipline on expenses. We continue to be pleased with the organic loan growth our teams have generated.
During the second quarter, our loan balances grew 3.8% annualized. On a year-to-date basis, our loan growth has been 5.4% annualized. Entering the second half of 2023, loan pipelines are strong, which should allow us to achieve our full year loan growth guidance of mid to high single digits. As I previously mentioned, our core deposit balances grew $539 million during the quarter, which allowed us to pay down the more expensive FHLB debt and bring our loan-to-deposit ratio down to 91%. During our first quarter's earnings call, we mentioned that market conditions were demanding more aggressive deposit pricing. That is reflected in this quarter's cost of deposits. Nevertheless, our total deposit beta to date through this cycle remains quite low at 22%.
Fully taxable equivalent net interest income for the quarter came in at $91.2 million, down $5.1 million from the prior quarter, driven by higher cost of deposits. The second quarter's new loan originations of $362 million came in at an average weighted yield of 8.2%, which resulted in our loan book yield increasing 24 basis points to 6.15%. The resulting net interest margin was 4.07%. We project NIM to dip slightly below 4% for the second half of 2023. In terms of our asset quality, it remains strong, with just 2 basis points of annualized net charge-offs and 1.25% allowance for total loans.
This quarter's provision expense covered new loan growth, nominal charge-offs, and supported the slight increase in the reserve requirement based on the CECL model from macroeconomic output changes. Total non-interest income for the second quarter was $13.8 million. Included in this quarter's results was $4.1 million in impairments related to our venture capital investments. This was a result of our quarterly equity investment assessment process, where we review the financial performance and market dynamics underlying our investments. Excluding this impact, our core banking fees grew $3.3 million versus the prior quarter, with an impressive 89% annualized. Service and bank card income increased $797,000 on a linked-quarter basis and $1 million over the same quarter last year.
Other banking income increased $2.5 million on a linked-quarter basis, mainly driven by Cambr fees and pickup in our mortgage banking income. Looking ahead for the second half of 2023, we project non-interest income to be in the range of $34 million-$36 million. Non-interest expense for the second quarter totaled $61 million, which was effectively flat for the prior quarter, excluding the first quarter's one-time, $2.5 million payroll tax credit interest. Expenses continue to be well controlled, for the second half of 2023, we are projecting non-interest expense to be in the range of $123 million-$125 million.
Finally, our capital ratios remain strong at 11.08% Common Equity Tier 1 ratio and 9.15% Tier 1 leverage ratio, and we maintain sufficient excess capital to provide for various strategic options. With that, I'll turn it back to you.
Tim Laney (Chairman, President, and CEO)
Thank you, Aldis. We remain focused on earning the full relationship of our clients. A focus on deposit growth and treasury management is not new to us, it's in fact, a core strength. We operate with zero broker deposits and a high level of non-interest-bearing deposits. With regard to credit, we have a comparatively low CRE exposure, and we continue to build and manage a diversified and granular loan portfolio. Finally, we operate in attractive markets that we believe will support tremendous growth opportunities for NBH. On that note, Anna, we are ready to open up the line for questions.
Operator (participant)
Yes, sir. Thank you. 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. Once again, that is star one, if you would like to ask a question. We'll now take our first question from Jeff Rulis with D.A. Davidson.
Brett Thompson (Equity Research Analyst)
Hi, this is Brett Thompson on for Jeff. I was wondering.
Tim Laney (Chairman, President, and CEO)
Good morning.
Brett Thompson (Equity Research Analyst)
Good morning. I was wondering if you could provide a bit more color on the $24 million increase in NPAs this quarter? Kind of what loan segment or segments is that increase coming from? Is it from several borrowers or kind of fewer large relationships? Kind of the type of relationships, legacy or acquired that those were. Then lastly, if you could provide thoughts on similar loans, not on nonaccrual that may be impacted.
Tim Laney (Chairman, President, and CEO)
Yeah, sure. Very good question. Look, the nonaccrual increase was driven really by one asset-based, lending-based relationship, and we believe we've already adequately reserved for any potential loss exposure there. Look, it's being well managed. It was asset-based. We feel comfortable with our advance rates, but as we've historically done, you know, we're going to be aggressive on dealing with any emerging problems.
Aldis Birkans (CFO)
Yeah, Brett, I would add that when looked at on total criticized loan, both actually came down this quarter, so this loan had been accounted and on radar for a period of time already.
Tim Laney (Chairman, President, and CEO)
Again, already adequately reserved for and, you know, I expect it to be resolved, if not third quarter, by the end of the year.
Brett Thompson (Equity Research Analyst)
Great. Thank you for that. If I could just ask one more. You guys touched on it a bit in the remarks, but, just to revisit it. With the increase in deposits, were those largely from the Cambr acquisition? If so, should we assume that those deposit transfers are largely done? Lastly, just as an outlook for deposit growth going forward, you have a goal to get to 90% loan-to-deposit ratio, which was achieved. Is that going to drift back up again?
Aldis Birkans (CFO)
Well, certainly the last part of that question will depend on the loan growth and deposit growth and behavior. Certainly, deposit, price for deposits has been intense over the last several months. To answer the first part of the question, yeah, a good chunk is Cambr related. We will not provide more detailed guidance just to keep ourselves give ourselves some flexibility in how we manage balance sheet. For that matter, the sort of the Cambr fees, we will not provide more guidance on forward basis either, just to give ourselves the ability to manage the balance sheet and flow that program without jeopardizing our competitive advantage.
Tim Laney (Chairman, President, and CEO)
Yeah, and I would add, while we're not going to provide specific guidance, obviously, we've got the flexibility to hold, larger levels of non-broker deposits for the Cambr, if we choose to do so. We like the business model, we like supporting other financial institutions, the spreads that come along with that. We've got flexibility there, but we certainly intend to strike a balance.
Brett Thompson (Equity Research Analyst)
Great. Thank you.
Tim Laney (Chairman, President, and CEO)
Thank you for your questions.
Operator (participant)
We'll now take our next question from Kelly Motta with KBW.
Speaker 7
Hi, good morning, guys.
Tim Laney (Chairman, President, and CEO)
Kelly, your voice has changed.
Speaker 7
Hey, sorry, this is Matt on for Kelly.
Tim Laney (Chairman, President, and CEO)
Hi, Matt.
Speaker 7
I wonder if we could just hit on, non-interest-bearing deposits for a second. One, see if you guys saw any trends with if the pace of those running off is slowing down or what we think they might stabilize at, or any kind of color you can give us on those non-interest-bearing deposits.
Aldis Birkans (CFO)
What we really, timing wise, what we saw, the biggest remix shift took place in late March, early April, let's call it, early part of the second quarter. That has stabilized and, as we sit today, for example, our non-interest-bearing deposits are flat through the month of July. We feel like at least the trends have normalized.
Speaker 7
Great. If you guys could give any more color just on margin, if you've seen the pace of margin decreasing, slowing down at all, or any kind of guidance you can give us on that?
Aldis Birkans (CFO)
Yeah, actually very, very similar comments on that, where the biggest repricing of the book did take place in late March and in month of April. I'll say that we are entering here month of July or third quarter with a margin right around 4%, so still holding into the 4%. No monthly margin for last quarter was below 4%. Again, the while on linked quarter basis, it may appear significant decrease, we forecasted that and signaled that, and I feel pretty good about where margin is stabilizing.
Speaker 7
Thank you, guys. Appreciate the color on that. I'll step back.
Aldis Birkans (CFO)
Thank you, Matt.
Operator (participant)
We'll now take our next question from Andrew Terrell with Stephens.
Andrew Terrell (Managing Director and Research Analyst)
Hey, good morning.
Tim Laney (Chairman, President, and CEO)
Good morning.
Andrew Terrell (Managing Director and Research Analyst)
Aldis, appreciate the color there on the, on the margin. Maybe just on the deposit cost specifically, do you have, similarly, the, the monthly or the spot interest-bearing deposit costs at the end of the second quarter? Just overall on kind of beta commentary, I think in the past, we had talked about a maybe 30%-35% type range for deposit beta. Does that still feel like it's an achievable kind of beta target through the cycle, or are you seeing more pressure than you would have anticipated?
Aldis Birkans (CFO)
Certainly, I think we all in the industry are seeing more pressure than we anticipated or historically would have thought. Like I mentioned in my prepared remarks, we are sitting at 22% beta through the cycle, which I would consider being extremely good still. Where it ends up is at this point, I don't think I'm gonna try to project that. In terms of the deposit costs and where we are entering the third quarter, deposit cost is roughly around 1.45% versus 1.27% that we reported for second quarter total.
It is certainly higher, but as I mentioned, again, the margin, the other side of the earning assets are more than offsetting, well, not more than offsetting, but offsetting that, and we are entering with a 4% margin here in the third quarter.
Tim Laney (Chairman, President, and CEO)
I would just add that certainly the intensity of the focus on rate, when compared to where it was at the end of the first quarter to today, is not as intense. Again, we've seen more stabilization. Now, could a number of Fed moves wake that back up, or other issues in the marketplace wake that back up? Possibly, but we have felt. Quite frankly, you know, in hindsight, we may have been too slow to move to raise rates at the beginning of the second quarter. We fancy ourselves as having a lot of discipline there. We really believe in the strength of our core deposits.
Quite frankly, as we moved through the second quarter, we just saw bank and non-bank competitive pricing force us to move at a rate that we wouldn't have expected. Do I expect that to occur again? Not really. Again, as Aldis pointed out, we don't really have that crystal ball.
Andrew Terrell (Managing Director and Research Analyst)
Yeah, totally understood. I appreciate the color, it does feel like, I guess, if deposit costs are around that 1.45% territory coming into the third quarter, that it does feel like the pricing pressure has slowed a little bit.
Tim Laney (Chairman, President, and CEO)
Mm-hmm.
Andrew Terrell (Managing Director and Research Analyst)
Maybe, Tim, I know you mentioned it maybe a little bit last quarter, but with Cambr now kind of completely in the fold and integration done, you guys have hit the ground running. Can you just talk about how you see this fitting within the overall 2UniFi build-out, and then maybe an overall status update on progress you've made in the second quarter to start the year on 2UniFi, just the overall build-out and how that plays in the bank?
Tim Laney (Chairman, President, and CEO)
Sure. No, thank you, thank you for asking. You know, we have weekly deep assessments of our projects, all related to 2UniFi, and I'm pleased to report that we are tracking on time against more than 90% of the work streams there. We still believe we'll be in friends and family testing in 2024. Just given what we've seen even here in the first six months of this year in terms of bank client behavior, we think 2UniFi is going to be incredibly important in the future of banking. I really want to applaud our team that's leading and working 2UniFi because they're driving toward the kind of projected deliverables and the time frames for those deliverables that we expected.
We're increasingly optimistic about the strategy and what it can, what it can do to serve small and medium-sized businesses across the country.
Andrew Terrell (Managing Director and Research Analyst)
I think we've also discussed a little bit in the past, the ability to kind of leverage some of what you're building there and the work the team's doing. into the core bank in terms of improving.
Tim Laney (Chairman, President, and CEO)
Mm-hmm.
Andrew Terrell (Managing Director and Research Analyst)
workflows or efficiency. Is that something we could also see if the 2UniFi is moving to friends and family in 2024? Could we see potential for increased or improved efficiency at the core bank as a result of that as well?
Tim Laney (Chairman, President, and CEO)
Yeah, I seriously doubt it. I mean, because we actually see the potential impact on the core to be much greater than just a revision of processes. I mean, we're working with a challenger core that's much more fluid, flexible, and low cost than, you know, what you would get from a traditional provider. You know, the opportunity after we fully live with it and believe in it, to shift our core bank to that platform could be a game changer. I don't see that happening in 2024 because we're gonna live with what we've built for a while before we make such a big bet.
Andrew Terrell (Managing Director and Research Analyst)
Understood. If I could ask just one more on modeling question, Aldis, on the release called out the Cambr-related acquisition expenses, I think $500,000 of transaction, and $600,000 in intangible amortization. Is the $500,000 that was called out a recurring item, or is that a more kind of one-time transitory expense?
Aldis Birkans (CFO)
No, that's one-time transitory expense.
Andrew Terrell (Managing Director and Research Analyst)
Okay.
Aldis Birkans (CFO)
And obviously-
Andrew Terrell (Managing Director and Research Analyst)
Thank you.
Aldis Birkans (CFO)
The $600,000 intangible amortization, that is unfortunately with us, but given how the accounting works, but the $500,000 is one time.
Andrew Terrell (Managing Director and Research Analyst)
Got it. Okay. Thank you.
Aldis Birkans (CFO)
Thank you.
Operator (participant)
We'll now take our next question from Andrew Liesch with Piper Sandler.
Andrew Liesch (Senior Equity Research Analyst)
Hey, guys, good morning.
Tim Laney (Chairman, President, and CEO)
Good morning.
Andrew Liesch (Senior Equity Research Analyst)
A question on the Cambr revenue, that $1.2 million that came on, when you guys closed the deal at the beginning of April, was that in line with your expectations, or was that a little high or a little low or just right?
Aldis Birkans (CFO)
For the amount of, call it excess deposits that we didn't keep, that were flowing through there, that's exactly in line what we expecting.
Andrew Liesch (Senior Equity Research Analyst)
Got it. Got it.
Tim Laney (Chairman, President, and CEO)
Is it fair to add on this thing? I know we don't want to jump into a lot of guidance here, but we haven't come close to fully optimizing the kind of revenue opportunity that will come out of Cambr.
Aldis Birkans (CFO)
Yeah, what Tim is alluding to is in terms of other opportunities where we see a potential fee in program growth opportunities, that is not part of this. This is just kind of taking over the program and hitting our financials the way we expected, and that is hitting the way we expecting it. We do believe there's ability to continue to expand the capabilities.
Andrew Liesch (Senior Equity Research Analyst)
Got it.
Aldis Birkans (CFO)
pull it out readiness.
Andrew Liesch (Senior Equity Research Analyst)
Got it. It's safe to assume that maybe this 1.2 number is already captured in the guidance at least for the back half of this year?
Aldis Birkans (CFO)
That is, yes.
Andrew Liesch (Senior Equity Research Analyst)
Okay. On the expense side, the guidance implies kind of a step up here. I'm just curious what would be driving that, more to 2UniFi investments. What's the, what's driving that uptick?
Aldis Birkans (CFO)
No, I think you hit it on the nail on the head, is the 2UniFi continued investment and expansion. The 2UniFi is what's driving that little bit increase in our expense guidance. I mentioned, once you back out and normalize that $2.5 million retention credit that we realized in the first quarter, our expenses are more or less flat on a quarter basis. That is, I'd say that is our current run rate, even though there is quite a bit of noise between processing fees being better and these one-time Cambr capital items. We do continue to expect to continue to increase our investments into 2UniFi and that will, that is in the guidance for second half.
Andrew Liesch (Senior Equity Research Analyst)
Gotcha. Can you just remind us, how is the balance sheet positioned right now for any additional changes in rates that the Fed might undertake?
Aldis Birkans (CFO)
Yeah, we've as time has progressed, we've been folding down our asset sensitivity. While we will benefit slightly here, if the Fed moves next week, not materially anymore, because, again, as we are nearing the top of the range of at least what the future start indicating of the Fed rate cycle, we certainly want to be able to protect our margin in a way, so rates way down type environment as well. Most of the asset sensitivity has played out as far as we, how we model it.
Andrew Liesch (Senior Equity Research Analyst)
Gotcha. Wonderful. Thank you for taking the questions. I'll step back.
Aldis Birkans (CFO)
Hey, thank you.
Operator (participant)
We'll now take a question from Brett Rabatin with Hovde Group.
Brett Rabatin (Head of Equity Research)
Hey, guys. Good morning.
Tim Laney (Chairman, President, and CEO)
Good morning.
Brett Rabatin (Head of Equity Research)
Morning. Wanted to start with any additional color that you could provide on the venture capital write-downs, you know, what that was a function of and just, you know, the businesses that you had to take a bit of a mark on?
Tim Laney (Chairman, President, and CEO)
Yeah, you know, let me say broadly, you know, we expect our investments to do well over time and, frankly, contribute to the build-out of, 2UniFi. I think most know that tech valuations are very challenging in the current market, and then the absence of fresh capital raises, it's pretty difficult to nail down those valuations. Candidly, I'll probably get in trouble for saying this, but it feels like at this point in the cycle, it's as much art as it is science. We're going to continue to take a conservative approach to the way we think about the business and work hard to validate that. We're not, you know, going to address, obviously, any specific names in that portfolio.
Aldis, you may want to just talk broadly to the, our total exposure there, and that might help answer Brooke's question.
Aldis Birkans (CFO)
Yeah. In terms of our total exposure to whether it's direct equity type investment or, co-venture fund that many other banks may be part of, we have approximately $50 million, a little shy of $50 million in terms of investment and exposure.
Brett Rabatin (Head of Equity Research)
Okay. That's helpful. Wanted to talk about, like, the balance sheet and the funding going forward. You know, obviously, you used Cambr and were a little more aggressive with the deposits to lower the FHLB advances this quarter. Do you have a goal of getting those off the balance sheet completely as you try and remix a little bit? Or can you give us some thoughts on your funding sources from here and how you manage that?
Aldis Birkans (CFO)
Yeah, no, absolutely, right? I mean, that is if you look at the items in our balance sheet, that by far is the most expensive cost of funding. In terms of maximizing our net income, it is goal to pay down as much as the Federal Home Loan Bank advances as possible. We do like to have capacity in terms of liquidity and access, so having small amounts on balance sheet and always have that machine greased, those wheels greased, so to make sure that we have access. Certainly that, again, over the last four months, has played out as an important source for banks to go in and make sure that they can fund day-to-day operations smoothly.
That's important, so we're not necessarily looking to maybe pay down the last penny, but directionally, we continue to look for ways to expand our deposit relationships and pay down the more expensive debt.
Brett Rabatin (Head of Equity Research)
Okay. just lastly, I wanted to clarify, I wasn't totally clear on the fee income guidance of $34 million-$36 million. Does that include or not include any potential improvement in the Cambr revenue going forward?
Aldis Birkans (CFO)
That's our rest of the year outlook for inclusive of all our lines of business, so including Cambr, mortgage, banking, the core banking piece.
Tim Laney (Chairman, President, and CEO)
I think that his question was, does it include any of the optimization of Cambr? The answer is no. We've just taken our expected run rate, you know.
Brett Rabatin (Head of Equity Research)
Okay.
Tim Laney (Chairman, President, and CEO)
Based on what we saw coming in the second quarter.
Brett Rabatin (Head of Equity Research)
Okay. If I could sneak in one last one. Tim, I'm curious, I've had a few banks tell me that they're starting to have a few conversations. Yet I'm curious if you've had anybody reach out to you or if you're hearing any early rumblings of maybe some deal activity at some point in the next few quarters.
Tim Laney (Chairman, President, and CEO)
You know, I'm not going to speak to specific conversations. We're always in conversations. Candidly, some, you know, interested in buying, others interested in selling. I would say in terms of our own view around acquisitions, we're really in a capital building mode, we really have a lot to absorb as we work through the remainder of this year. We're going to remain conservatively postured as it relates to questions around where the economy might go. You know, I think it'll set us up nicely for 2024 with a lot of optionality.
Brett Rabatin (Head of Equity Research)
Okay. That's very cool. I appreciate it.
Tim Laney (Chairman, President, and CEO)
You bet. You bet. Thanks for the questions.
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, Anna. You know, as we noted, pipelines are strong as we look into the second half of the year. We continue to feel great about the markets that we operate in. Cost of deposits appears to be stabilizing. Knock on wood, we won't see any more kind of dramatic action in the marketplace. Criticized assets actually came down in the quarter. We feel very good about the quality of the loan portfolio and its performance, and our ability to resolve issues quickly when they do present themselves. Again, well positioned for a solid second half of the year. Thanks, everyone, for your questions and your time today. Have a good day. Bye now.
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. Have a great day. You may now disconnect.