National Bank Q3 2023 Earnings Call Transcript

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October 25, 2023

There are 6 speakers on the call.

Operator

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.

Operator

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.

Operator

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 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. At 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.

Operator

Please go ahead, sir.

Speaker 1

Thanks, Marjorie. Good morning and thank you for joining us as we discuss National Bank Holdings' Q3 2023 financial results. I'm joined by Aldis Birkins, 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 continue to build capital ending the quarter with a CET1 ratio of 11.61 percent I'll add that we continue to be pleased with our asset quality with just one basis point of charge offs for the quarter. Further, we expect to reduce non accruals during the Q4 having already experienced a nice reduction during the first 3 weeks of the Q4.

Speaker 1

And on that note, I'll turn the call over to Aldis.

Speaker 2

All right. Well, thank you, Tim, and good morning. Thank you for joining our earnings call this quarter. For the Q3 of 2023, we delivered another quarter of strong financial performance with earnings of $36,100,000 or $0.94 per diluted share. Overall, this resulted in The return on average tangible assets of 1.58 percent and the return on tangible common equity of 18.38%.

Speaker 2

On a linked quarter basis, we grew our pre provision net revenue by $4,000,000 And on a year to date basis, Adjusting for acquisition expenses incurred in the prior year, our pre provision net revenue increased by $51,200,000 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 Q3 were $324,100,000 at abated average yield of 8.6 percent. And on a year to date basis, we have funded $1,100,000,000 in new loans, bringing our total loan balance growth to 4.8% rates annualized.

Speaker 2

Several loan fundings pushed into the 4th quarter And combined with the remaining loan pipeline for the 4th quarter, we expect to achieve our full year loan growth guidance. Our core deposit balances grew $28,000,000 on a spot basis and $116,000,000 or 5.8 percent 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 3rd quarter's total deposit cost was 1.64% and we do expect that to continue to drift higher.

Speaker 2

Fully taxable equivalent net interest income for the quarter came in at $89,400,000 A slight decrease to the 2nd quarter and an $18,900,000 increase over the last year's Q3. The resulting net interest margin for the quarter was 3.92 percent and we project NIM to be in the range of 3.8% to 3.85 percent for the Q4 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 provision Expense was primarily driven by new loan growth. The portfolio trends remain well behaved and on overall basis Well behaved on an overall basis and consequently our allowance of total loan loss coverage remained at 1.25% during the quarter.

Speaker 2

Both NPA and NPL ratios improved over the prior quarter as did our classified loan ratio. Total non interest income for the 3rd quarter was Strong $19,400,000 an increase of $5,500,000 on a linked quarter basis. The core banking fees showed strong performance, resulting in 12.9 percent annualized growth in bank card and service charges combined. Other banking income benefited from a $1,100,000 gain on sale of Mortgage Servicing Rights this quarter and solid performance from our diversified fee generation businesses such as Trust and Wealth Management is being a long sale gains and Camber. Looking ahead for the Q4 of 2023, We project non interest income to be around $16,000,000 a linked quarter decrease mostly driven by the seasonal slowdown in mortgage related income.

Speaker 2

Non interest expense for the 3rd quarter totaled $60,600,000 a decrease of $400,000 from the prior quarter. Expenses continue to be well controlled and we continue to find efficiencies that allow us to fund our investment in 2U and other technologies. The 3rd quarter's 2 year expenses were approximately $2,000,000 and we expect them to grow to close to $3,000,000 in the 4th. The 4th quarter's total non interest expenses are projected to be in the range of $60,000,000 to $62,000,000 which will bring the full year 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.

Speaker 2

Then, Vedat, I will turn it back to you.

Speaker 1

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. And as previously covered, asset quality trends was positive and we continue to deliver an attractive return while building capital. So on that note, let's go ahead and open up the lines for questions.

Operator

And while we build that queue, we'll take our first question from Jeff Rulis from D. A. Davidson. Please go ahead.

Speaker 3

Thanks. Good morning.

Speaker 2

Good morning, Jeff.

Speaker 3

Good morning. I wanted to check on the timing of FHLB advanced sort of reductions. Was that largely Over the kind of gradual over the pace of the quarter?

Speaker 2

It was, and with a bigger pop at the end of the quarter, We kind of continue to given that average balances grew so much relative to spot, we were able to pay down chunk of it throughout the quarter.

Speaker 3

Okay. And strategy wise, I guess, pending deposit success, the expectation would be to Further reduce that, how do you feel on liquidity?

Speaker 2

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 sorry, Unencumbered investment portfolio, the cash that we hold, we have various sources that we stressed us through liquidity and we feel good In terms of how FHLB balances will evolve here throughout the end of the year, it will largely be driven by The remaining loan growth and to deposit growth.

Speaker 1

And it is noteworthy, Jeff, on a related note that We operate with 0 broker deposits. So in fact, that's historically been the case and certainly The case through the cycle.

Speaker 3

And all this, I missed it. The full year guide on loan growth,

Speaker 2

Yes, the full year guidance has been mid to single digits mid to high. And we are, as I mentioned, 4.8% year to date, but the 4th quarter is looking quite Strong with couple loans pushing here in the 4th and we certainly look to be above 5.

Speaker 3

Got it. And did you have a September net interest margin average as it compares to the 3.92% for the full quarter?

Speaker 2

Yes, the September margin was 172. I'm sorry, sorry, 172. That's our cost of deposits. September margin was 3.90%. 3.90, okay.

Speaker 3

Got it. Just jumping to credit For a minute, it sounds like, Kim, you've got some nice reductions coming in the 4th quarter. I You can imagine is this some progress on some of the non accruals that were brought forward in the Q2?

Speaker 1

That's exactly right. That's exactly right.

Speaker 3

And any kind of size of that or you just at this point expecting some wins and We'll leave it at that.

Speaker 1

Yes, I would say it's probably given where we're at into the Q4, probably Best we wait to report

Speaker 2

on that at on the

Speaker 1

next earnings call. But we feel good about frankly all of our credit quality trends. And make no mistake, we believe as we look ahead to 'twenty four that we're going to benefit from having Very little exposure in areas like office and retail. Again, in both of those cases, Exposure is less than 2% of the total loan book for each.

Speaker 3

Yes. I noticed There was a sequential, pretty meaningful drop in accruing modified loans in the quarter, kind of down $13,000,000 Was there a payoff in that bucket?

Speaker 2

There was.

Speaker 3

Okay. All right. I will step back. Thank you.

Speaker 2

All right. Thank you, Jeff.

Operator

Thank you. And we'll next go to Kelly Motta with KBW.

Speaker 4

Hi, good morning. Thanks so much for the question.

Speaker 1

Good morning, Kelly.

Speaker 4

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 if it's broad based across kind of like all the markets you're in or if you're seeing

Speaker 1

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 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.

Speaker 4

Okay. That's helpful. And switching to the deposit side, looks like there was Some outflow of non interest bearing, just wondering if you expect to see some continued migration out of that line as Borrowers use some of their liquidity to pay down lines, just operating costs as well as migration to higher cost funding I guess how when do you see that line item bottoming out and Any sort of guidance in terms of where that should be as a percentage of total deposits?

Speaker 1

We really have Seeing a reduction in that glide ratio down. And I think for a little more color, Where we've interestingly enough seen the most pressure 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.

Speaker 4

Got it. Maybe a last question for me. I was hoping I didn't hear anything on capital in the prepared remarks. Just wondering, levels look pretty healthy here. Just wondering if you could walk through again What your capital priorities are?

Speaker 4

Any interest in the buyback? And I know you were very active in and A last year, but wondering if there's any pace of conversation

Speaker 1

Number 1, we Operate with an authorization to engage in buybacks and we certainly have a targeted price at which we would engage. On the M and 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 'twenty four and that's unfolding nicely. That would be Our expectation is to reengage and again perhaps even on a more opportunistic basis.

Operator

Thank you. And next we'll go to Andrew Terrell from Stephens. Please go ahead.

Speaker 5

Hey, good morning, Tim. Good morning, Aldis.

Speaker 2

Good morning. Good morning.

Speaker 5

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 4th quarter. Can you disclose what the New yield is for originations right now. I think it was kind of high 8% range last quarter?

Speaker 2

Yes, 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 plus percent.

Speaker 3

Okay.

Speaker 5

Got it. I appreciate it. And then on the time deposit portfolio, it's really impressive that I mean the cost was $248,000,000 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?

Speaker 2

Yes. There's a mixed bag. There is 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. So the weighted average rate on new time deposits has been around 3.5% to 3.8% type of percent. But I will say that unlike Maybe the bad rep that broker deposits have gotten a while back.

Speaker 2

We've always had time deposit being a focus And making sure that we get duration on those deposits. So there is a long tail in terms of Pricing, that is certainly helping here as well. And historically and currently, time deposits have not been

Speaker 1

A meaningful part of our marketing campaign and I wouldn't expect to begin doing so in 'twenty four. So, obviously, it's an important part of the balance sheet, but it's not an area that we heavily rely upon.

Speaker 5

Yes, 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 Q4 is pretty close relative to Where you came in at in late September, and it feels like with new originations coming on in 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?

Speaker 2

Well, I'll say, I'll say that for Q4 we feel pretty good about that guidance and it certainly is showing a slowdown, right, In terms of the pace of decreases from 30 something basis points to 15 last in the quarter before 15 last quarter and certainly implying here Slow down again. Where are we going to be in 2024, we'll wait to provide our guidance until our January call.

Speaker 5

Yes, understood. Okay. And then last one, Aldis, do 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?

Speaker 2

Starting with the latter one, nothing in near term. We certainly this is our second one In last 3 years and what we do is it's really it's not necessarily 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 I will say that we sold down approximately half of our asset and half of our portfolio that we were servicing here, which Just another component here is going to provide us opportunities to think how smartly how those resources that were supporting that portfolio will be allocated on a go forward basis.

Speaker 5

Yes, understood. Okay. Thank you for taking the questions. I appreciate it.

Speaker 1

Thank you.

Operator

Thank you. We'll next go to Andrew Liesch with Piper Sandler. Please go ahead.

Speaker 5

I think you've covered nearly everything. On expenses, you mentioned the 2 unify Costs much stepping up to $3,000,000 this quarter. Is $3,000,000 a good run rate? I guess how should we be looking at those costs going into next year?

Speaker 2

Yes. 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 $3,000,000 is today's run rate and that's where we were in September, that's where it will be in October in terms Quarterly run rate, so I'll just leave it at that.

Speaker 5

Got it. I guess then as As far as to Unifi is concerned, I mean, when do you think we could start to see some revenue from that business fall to the bottom line Mr. Earnings?

Speaker 1

Yes. We believe we're going to be positioned to take to unify 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 'twenty four. I wouldn't expect meaningful revenue to be coming in, in 'twenty four. It's really more of a 'twenty five focus and beyond.

Speaker 5

Got it. Thank you. Yes, you've covered everything else that I have on my list here. Thanks so much. I'll step back.

Speaker 1

Yes. Thank you very much. Thanks, Andrew.

Operator

Thank you. And 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.

Speaker 1

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

In 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.

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Earnings Conference Call
National Bank Q3 2023
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