National Bank - Q3 2023
October 24, 2023
Transcript
Operator (participant)
Good morning, everyone, and welcome to the National Bank Holdings Corporation 2023 Third Quarter Earnings Call. My name is Marjorie, and 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, tax, 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. Please go ahead, sir.
Tim Laney (Chairman, President and CEO)
Thanks, Marjorie. Good morning, and thank you for joining us as we discuss National Bank Holdings' third quarter 2023 financial results. I'm joined by Aldis Birkans, our Chief Financial Officer. We delivered a 10.8% increase in earnings for the quarter, with year-over-year pre-provision revenues growing 54.6%, while doubling net income during the same period. We continued to build capital, ending the quarter with a CET1 ratio of 11.61% and delivering a healthy 18.38% return on tangible common equity. I'll add that we continue to be pleased with our asset quality, with just 1 basis point of charge-offs for the quarter. Further, we expect to reduce nonaccruals during the fourth quarter, having already experienced a nice reduction during the first three weeks of the fourth quarter.
On that note, I'll turn the call over to Aldis.
Aldis Birkans (CFO)
All right. Well, thank you, Tim, and good morning. Thank you for joining our earnings call this quarter. For the third quarter of 2023, we delivered another quarter of strong financial performance with earnings of $36.1 million, or $0.94 per diluted share. Overall, this resulted in a return on average tangible assets of 1.58% and a return on tangible common equity of 18.38%. On a linked quarter basis, we grew our pre-provision net revenue by $4 million, and on a year-to-date basis, adjusting for acquisition expenses incurred in the prior year, our pre-provision net revenue increased by $51.2 million, or 55%, driven by organic balance sheet growth, well-executed acquisitions, and, as always, strong discipline on expenses. We continue to be pleased with the loan growth our teams have generated.
New loan originations during the third quarter were $324.1 million at a weighted average yield of 8.6%. On a year-to-date basis, we have funded $1.1 billion in new loans, bringing our total loan balance growth to 4.8% rate annualized. Several loan fundings pushed into the fourth quarter, and combined with the remaining loan pipeline for the fourth quarter, we expect to achieve our full-year loan growth guidance. Our core deposit balances grew $28 million on a spot basis and $116 million, or 5.8% annualized on average balance basis. Deposit pricing has continued to reflect the higher rates paid by the banking industry, yet our cycle-to-date total deposit beta remains quite low at 28%.
The third quarter's total deposit cost was 1.64%, and we do expect that to continue to drift higher. Fully taxable equivalent net interest income for the quarter came in at 89.9-- $89.4 million, a slight decrease to the second quarter and an $18.9 million increase over the last year's third quarter. The resulting net interest margin for the quarter was 3.92%, and we project NIM to be in the range of 3.8%-3.85% for the fourth quarter of 2023. In terms of asset quality, our loan portfolio continues to perform nicely, with only 1 basis point annualized net charge-offs in the quarter. This quarter's pre-provision expense was primarily driven by new loan growth.
The portfolio trends remain well behaved, and on an overall basis... well behaved on an overall basis, and consequently, our allowance for total loan loss coverage remained at 1.25% during the quarter. Both NPA and NPL ratios improved over the prior quarter, as did our classified loan ratio. Total non-interest income for the third quarter was strong, $19.4 million, an increase of $5.5 million on a linked quarter basis. The core banking fees showed strong performance, resulting in 12.9% annualized growth in bank card and service charges combined.
Other banking income benefited from a $1.1 million gain on sale of mortgage servicing rights this quarter and showed solid performance from our diversified fee generation businesses such as trust and wealth management, SBA loan sale gains, and Cambr. Looking ahead for the fourth quarter of 2023, we project non-interest income to be around $16 million, a linked quarter decrease, mostly driven by the seasonal slowdown in mortgage-related income. Non-interest expense for the third quarter totaled $60.6 million, a decrease of $0.4 million from the prior quarter. Expenses continue to be well controlled, and we continue to find efficiencies that allow us to fund our investment into 2U and other technologies. The third quarter's 2U expenses were approximately $2 million, and we expect them to grow to close to $3 million in the fourth.
The fourth quarter's total non-interest expenses are projected to be in the range of $60 million-$62 million, which will bring the full year 2023 expenses to be below the low end of our guidance. Finally, we continue to build our capital, with TCE ratio increasing to 8.5% and Tier 1 leverage ratio increasing to 9.56%. Our tangible book value per share grew 9.2% annualized to $21.43, more than offsetting dividends paid and any increases in AOCI loss due to higher long-term interest rates. Tim, with that, I will turn it back to you.
Tim Laney (Chairman, President and CEO)
Thank you, Aldis. Well, we believe we're set up for a solid finish to the year. Our pipeline of new business has been building as we approach year-end. As previously covered, asset quality trends are positive, and we continue to deliver an attractive return while building capital. On that note, let's go ahead and open up the lines for questions.
Operator (participant)
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypads. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one. While we build that queue, we'll take our first question from Jeff Rulis from D.A. Davidson. Please go ahead.
Jeff Rulis (Managing Director and Senior Research Analyst)
Thanks. Good morning.
Aldis Birkans (CFO)
Good morning, Jeff.
Tim Laney (Chairman, President and CEO)
Good morning.
Jeff Rulis (Managing Director and Senior Research Analyst)
Wanted to check on the timing of FHLB advance sort of reductions. Was that largely over the kind of gradual over the pace of the quarter?
Aldis Birkans (CFO)
It was, and with a bigger pop at the end of the quarter. But, as we kind of continued to build, given the average balances grew so much relative to spot, we were able to pay down a chunk of it, throughout the quarter.
Jeff Rulis (Managing Director and Senior Research Analyst)
Okay. And, strategy-wise, you know, I guess pending, you know, deposit success, the expectation would be to further reduce that. How do you feel on liquidity?
Aldis Birkans (CFO)
Well, in terms of liquidity, we feel very well. I mean, with the addition of Camber as a source of off-balance sheet liquidity, Federal Home Loan Bank, undrawn lines that we do have, the on-balance sheet, unfunded, unencumbered investment portfolio, the cash that we hold, we have various sources that we stress test through liquidity, and we feel good. In terms of how FHLB balances will evolve here throughout the end of the year, you know, it will largely be driven by the remaining loan growth and to deposit growth.
Tim Laney (Chairman, President and CEO)
It is noteworthy, Jeff, on a related note, that we operate with zero broker deposits. So-
Jeff Rulis (Managing Director and Senior Research Analyst)
Mm-hmm.
Tim Laney (Chairman, President and CEO)
In fact, that's historically been the case and certainly the case through this cycle.
Jeff Rulis (Managing Director and Senior Research Analyst)
Yep. And Aldis, I missed the full-year guide on loan growth. I may have-
Aldis Birkans (CFO)
Yeah, the full year guidance has been mid- to high-single digits. And we are, as I mentioned, 4.8% year to date, but the fourth quarter is looking quite strong, with a couple loans pushing here in the fourth, and we certainly look to be above 5%.
Jeff Rulis (Managing Director and Senior Research Analyst)
Got it. And did you have a September net interest margin average as it compares to the 3.92% for the whole quarter?
Aldis Birkans (CFO)
Yeah, the September margin was 172. I'm sorry, 172, that's our cost of deposits. September margin was 390.
Jeff Rulis (Managing Director and Senior Research Analyst)
Three ninety, okay. Got it. You know, just jumping to credit for a minute. You know, sounds like, Tim, you've got some nice reductions coming in the fourth quarter. I can imagine, is this some progress on some of the nonaccruals that were brought forward in the second quarter?
Tim Laney (Chairman, President and CEO)
That's exactly right. That's exactly right.
Jeff Rulis (Managing Director and Senior Research Analyst)
In any kind of size of that, or you just, at this point, expecting some wins and we'll leave it at that?
Tim Laney (Chairman, President and CEO)
Yeah, I would say it's probably, given where we're at into the fourth quarter, probably best we wait to report on that at on the next earnings call. But we feel good about, frankly, all of our credit quality trends. And you know, make no mistake, we believe as we look ahead to 2024, that we're going to benefit from having very little exposure in areas like office and retail. Again, you know, in both of those cases, exposure is less than 2% of the total loan book for each.
Jeff Rulis (Managing Director and Senior Research Analyst)
Yeah. I noticed there was a sequential, pretty meaningful drop in accruing modified loans in the quarter, kind of down $13 million. Was there, was there a payoff in that bucket?
Aldis Birkans (CFO)
There was.
Jeff Rulis (Managing Director and Senior Research Analyst)
Okay. All right, I will step back. Thank you.
Tim Laney (Chairman, President and CEO)
All right. Thank you, Jeff.
Operator (participant)
Thank you. We'll next go to Kelly Motta with KBW.
Kelly Motta (Managing Director)
Hi, good morning. Thanks so much for the question.
Tim Laney (Chairman, President and CEO)
Good morning, Kelly.
Kelly Motta (Managing Director)
It looks like there was some very nice growth on owner-occupied CRE. Just wondering, kind of the opportunities you're seeing, what's going on in your markets, if there's any, you know, if it's, if it's broad-based across, kind of like all the markets you're in, or if you're seeing any, any sort of trend?
Tim Laney (Chairman, President and CEO)
Well, Kelly, as a practical matter, we strive to bank the full relationship, the full banking relationship of our business clients, and oftentimes that certainly does involve financing the facilities that they operate in. The beauty of that is, you know, unlike traditional commercial real estate, where you're not picking up the depository business, our approach is to earn all of the depository business that goes with that business and have a keen insight into the global cash flow and the ability of that business to service all debt, including any facilities debt.
Kelly Motta (Managing Director)
Okay, that's helpful. And switching to the deposit side, looks like there was some outflow of non-interest bearing. Just, you know, wondering if you expect to see some continued migration out of that line as borrowers use some of their liquidity to pay down lines and just operating costs as well as, you know, migration to higher cost funding sources. I guess how, when do you see that line item bottoming out and any sort of guidance in terms of the, where that should be as a percentage of total profits?
Tim Laney (Chairman, President and CEO)
Ooh, we really have seen a reduction in that glide ratio down. And I think for a little more color, you know, where we've interestingly enough seen the most pressure is coming out of our consumer book of business. And back to the discussion point earlier, with the success we're having growing commercial relationships, that's the opportunity to begin to grow through that decline on the consumer side with non-interest bearing deposits that come out of core operating relationships. So we don't, at this point, expect any major changes in that particular part of the business.
Kelly Motta (Managing Director)
Got it. Maybe a last question for me. I was hoping, I didn't hear anything on capital in the prepared remarks. Just wondering, you know, levels look pretty healthy here. Just wondering if you could walk through again what your capital priorities are, any interest in a buyback. And I know you were very active in M&A last year, but wondering if there's any pace of conversation, changes in the pace of conversation.
Tim Laney (Chairman, President and CEO)
Yeah. Yeah, great, great question. Thanks for asking. Number one, we operate with an authorization to engage in buybacks, and we certainly have a targeted price at which we would engage. On the M&A front, we've committed to stand down. Really, when I say committed, we made the decision ourselves to stand down this year, ensure we had complete integration of the last acquisitions to rebuild capital and to put ourselves in a position to be opportunistic in 2024, and that's unfolding nicely. That would be our expectation, is to reengage, and again, perhaps even on a more opportunistic basis.
Kelly Motta (Managing Director)
Got it. That's super helpful. I really appreciate all the color, Tim. I'll step back.
Tim Laney (Chairman, President and CEO)
All right. Thank you, Kelly.
Operator (participant)
Thank you. Next, we'll go to Andrew Terrell from Stephens. Please go ahead.
Andrew Terrell (Managing Director and Research Analyst)
Hey, good morning, Tim. Morning, Aldis.
Tim Laney (Chairman, President and CEO)
Good morning.
Aldis Birkans (CFO)
Good morning.
Andrew Terrell (Managing Director and Research Analyst)
Hey, I had a few questions maybe on the margin. One, it sounds like loan growth or at least originations, kind of shaping up to be pretty solid in the fourth quarter. Can you disclose what the new yield is for originations right now? I think it was kind of high 8% range last quarter.
Tim Laney (Chairman, President and CEO)
Yeah, last quarter was 8.6. I'll say the last month, so September month, was 8.9%, for example. So, and that includes advances on existing lines, which typically are some lower levels. So new fixed rate loans got funded actually at 9%+.
Andrew Terrell (Managing Director and Research Analyst)
Okay. Got it. I appreciate it. And then on the time deposit portfolio, it's really impressive that, I mean, the cost was 2.48% this quarter. Just relative to the market, that feels pretty low. Just wanted to get a sense of where you're pricing new CDs at today and how that compares to the market.
Tim Laney (Chairman, President and CEO)
Yeah. You know, there's a mixed bag. There's certainly certain time deposits that just roll over and have been for years, and frankly, decades, that are rates that are much more advantageous where you pay for a new client to come in.
Aldis Birkans (CFO)
So the weighted average rate on new time deposits has been around 3.5% to 3.8% type of. But I'll say also, I will say that our, you know, unlike maybe the bad rep that broker deposits had gotten and a long while back, you know, we've always had time deposit being a focus and making sure that we get duration on those deposits. So there is a, you know, a long tail in terms of the pricing that is certainly helping here as well.
Tim Laney (Chairman, President and CEO)
Historically and currently, time deposits have not been a meaningful part of our marketing campaign, and I wouldn't expect to begin doing so in 2024. So, you know, I obviously, it's an important part of the balance sheet, but it's not an area that we heavily rely upon.
Andrew Terrell (Managing Director and Research Analyst)
Yep, understood. Okay. And then just maybe netting together on the margin. Sounds like, I mean, the month of September not far off the quarterly average. The guidance for the fourth quarter is pretty close relative to where you came in at in late September. And it feels like with new originations coming on at that kind of clip and maybe some lingering deposit pressure, does it feel like you can kind of hold that margin in this 3.8-3.85 type band moving forward? Or is it more of kind of wait and see?
Aldis Birkans (CFO)
Well, I'll say, I'll say that for fourth quarter, we feel pretty good about that guidance. And it certainly is showing a slowdown, right, in terms of a pace of, of decreases from 30-something basis points to 15 last, in the quarter before, 15 last quarter, and, and certainly implying here, slowdown again. And, you know, where are we going to be in 2024? We'll, we'll wait to provide our guidance until, our January call.
Andrew Terrell (Managing Director and Research Analyst)
Yep, understood. Okay, and then last one. Obviously, you have the, on the MSR sale this quarter, do you have what the pricing was on that sale? And then do you anticipate any more MSR sales moving forward?
Aldis Birkans (CFO)
Starting with the latter one, nothing in near term. We certainly—this is our second one in last three years, and what we do is it's really, it's not necessarily, like, for the gain, we manage risk, operational risk purposes. We do these sell downs. And since we are not building, rebuilding that asset as fast, given the mortgage business right now, I don't foresee another sale in near term here.
In terms of pricing, it's something that we haven't disclosed, and I can say, well, I will say that we sold down approximately half of our assets and half of our, you know, portfolio that we were servicing here, which, you know, just another component here is going to provide us opportunities to think smartly how those resources that were supporting that portfolio will be allocated on a go-forward basis.
Andrew Terrell (Managing Director and Research Analyst)
Yep, understood. Okay, thank you for taking the questions. I appreciate it.
Aldis Birkans (CFO)
Hey, thank you.
Operator (participant)
Thank you. We'll next go to Andrew Liesch with Piper Sandler. Please go ahead.
Andrew Liesch (Managing Director)
Hey, good morning, guys. Thanks for taking the questions.
Aldis Birkans (CFO)
Good morning.
Andrew Liesch (Managing Director)
I think you've covered nearly everything. On expenses, you mentioned the 2UniFi costs, much stepping up to $3 million this quarter. Is $3 million the good run rate? I guess, how should we be looking at that, at those costs going into into next year?
Aldis Birkans (CFO)
It's again, well, I'll... For full year, I'll provide guidance in terms of what 2024 will look like in January. I'll say that $3 million is today's run rate, and that's where we were in September. That's where it will be in October in terms of quarterly run rate, so I'll just leave it at that.
Andrew Liesch (Managing Director)
Got it. As far as 2UniFi is concerned, I mean, when do you think we could start to see some revenue from that business fall to the bottom line with earnings?
Tim Laney (Chairman, President and CEO)
Yeah. We believe we're going to be positioned to take 2UniFi on the road and begin to demonstrate some of the friends and family work that we're doing, we'll be doing with it in the second half of 2024. I wouldn't expect meaningful revenue to be coming in in 2024. It's really more of a 2025 focus and beyond.
Andrew Liesch (Managing Director)
Got it. Thank you. Yeah, you've covered everything else that I've have on my list here. Thanks so much. I'll step back.
Aldis Birkans (CFO)
Thank you. Yeah, thank you very much.
Tim Laney (Chairman, President and CEO)
Thanks, Andrew.
Operator (participant)
Thank you. I am showing we have no further questions at this time, so I'll now turn the call back to Mr. Laney for any closing remarks.
Tim Laney (Chairman, President and CEO)
Thank you again, and I would just thank everyone for joining us today, and feel free to follow up if you have other questions. Have a good day.
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, and 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.