National Bank Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 20, 2023

There are 5 speakers on the call.

Operator

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2023 Second Quarter 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.

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, 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.

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 investors. Reconciliations of these non GAAP financial measures to the GAAP measures are provided in the news release posted on the Investors section I'm sorry, 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.

Operator

Please go ahead, sir.

Speaker 1

Thank you, Anna. Good morning, and welcome to National Bank Holdings' Q2 2023 earnings call. I'm joined by Aldous Perkins, our Chief Financial Officer. We delivered solid earnings for the quarter, representing a year to date increase of $34,100,000 or 88 percent over prior year same period earnings. Our core earnings engine remains strong and adjusting for the impact of investment valuations met our expectations.

Speaker 1

Our credit quality is excellent, and our core deposits grew 29% annualized during the 2nd quarter. With a common equity Tier 1 ratio of 11.08% and ample liquidity, we continue to serve as a source of strength And on that note, I'll turn the call over to Aldis. Aldis?

Speaker 2

All right. Well, thank you, Tim, and good morning. Thank you for joining our earnings call this quarter. For the Q2 2023, we reported net earnings of $32,600,000 or $0.85 per diluted share. The closing and integration of the Canber acquisition has gone extremely well.

Speaker 2

It already is contributing nicely to our financial results. The core deposit is growing $539,000,000 this quarter with 29% annualized. On a year over year basis, we have grown our quarterly Pre provisioned net revenue by $14,500,000 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 Q2, our loan balances grew 3.8% annualized.

Speaker 2

And on a year to date basis, our loan growth has been 5.4% annualized. Entering the second half of twenty twenty three, loan pipelines are strong, which should allow us to achieve our full year long growth guidance of mid As I previously mentioned, our quarter dollar balances grew $539,000,000 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 Q1's earnings call, we mentioned that market conditions are demanding more aggressive deposit pricing, and that is reflected in this quarter's cost of deposits. Nevertheless, our total deposit data to date through this cycle remains quite low at 22%. Fully taxable equivalent net interest income for the quarter payment of $91,200,000 down 5 point $1,000,000 from the prior quarter driven by higher cost of deposits.

Speaker 2

The 2nd quarter's new loan originations of $362,000,000 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% and we project NIM to bid slightly below 4% for the 2nd half of twenty twenty three. In terms of our asset quality, it remains strong with just 2 basis points of annualized net charge offs And 1.25 percent allowance to total loans. This quarter's provision expense covered new loan growth, nominal charge offs Anne supported a slight increase in the reserve requirements based on the CECL model from macroeconomic outlook changes. Total non interest income for the Q2 was $13,800,000 Included in this quarter's results was $4,100,000 in impairments related to our venture capital investments.

Speaker 2

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 $3,300,000 versus the prior quarter with an impressive 89% annualized. Service and bank card income increased $797,000 on linked quarter basis and $1,000,000 for the same quarter last year. Other banking income increased $2,500,000 on a linked quarter basis, mainly driven by CAMBER fees and pickup in our mortgage banking income. Looking ahead for the second half of twenty twenty three, we project non interest income to be in the range of $34,000,000 to $36,000,000 Non interest expense for the Q2 totaled $61,000,000 which was effectively flat with the prior quarter, Excluding the Q1's one time $2,500,000 payroll tax credit interest, expenses continue to be well controlled For the second half of twenty twenty three, we are projecting non interest expense to be in the range of $123,000,000 to $125,000,000 Finally, our capital ratios remain strong at 11.08 percent common equity Tier 1 ratio and 9.15 percent Tier 1 leverage ratio.

Speaker 2

And we maintain sufficient excess capital to provide for various strategic options. And with that, I'll turn it back to you.

Speaker 1

Thank you, Aldis. We remain focused on earning the full relationship with our clients. Our focus on deposit growth and treasury management is not new to us. It's In fact, the core strength, we operate with 0 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.

Speaker 1

Finally, we operate in attractive markets that we believe will support tremendous growth opportunities For NVH. And on that note, Anna, we are ready to open up the line for questions.

Operator

Yes, sir. Thank you. And we'll now take our first question from Jeff Rulis with D. A. Davidson.

Speaker 3

Hi. This is Brett Thompson on for Jeff.

Speaker 2

I was wondering if you could provide

Speaker 3

a bit more color on the good morning. I was wondering if you could provide a bit more color On the $24,000,000 increase in NPAs this quarter, kind of what loan segment or segments is that increase coming from? From several borrowers or kind of fewer large relationships and kind of the type of relationships, legacy or acquired that those were? And then lastly, if you could provide thoughts on similar loans on non accrual that may be impacted?

Speaker 1

Yes, sure. Very good question. Look, the non accrual 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. So Look, it's been well managed. It was asset based.

Speaker 1

We feel comfortable with our advance rates. But as we've historically done, we're going to be aggressive On dealing with any emerging problems.

Speaker 2

Yes. And Brett, I would add that when we look at some total criticized loan Both actually came down this quarter, so the stone had been accounted for a period of time already.

Speaker 1

So again, already Adequately reserved for and I expect it to be resolved if not Q3 by the end of the year.

Speaker 3

Great. Thank you for that. And then 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 Camber acquisition? And if so, should we assume that Those deposit transfers are largely done.

Speaker 3

And then 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?

Speaker 2

Well, certainly the last part of that question will depend on the loan growth and deposit growth and behavior. Certainly, deposit flexible deposits has been Intense over the last several months. But to answer the first part of the question, yes, the Guchamp is CAMBA 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 So the Camber fees, we will not provide more guidance on forward basis either just to give us the ability to manage the balance sheet and Flow with that program without jeopardizing our competitive advantage.

Speaker 1

Yes. And I would add, well, we're not going to provide specific guidance. Obviously, we've got the flexibility to hold larger levels of non broker deposits It's for the camera if we choose to do so, but we like the business model. We like supporting other financial institutions, the spreads That come along with that. And so we've got flexibility there, but we certainly intend to strike a balance.

Speaker 3

Great. Thank you.

Speaker 1

Thank you for your questions.

Operator

We'll now take our next question from Kelly Motta with KBW.

Speaker 2

Good morning, guys.

Speaker 1

Kelly, your voice has changed.

Speaker 2

Hey, sorry. This is Matt on for Kelly.

Speaker 3

I

Speaker 2

wonder if you could just hit on non interest bearing deposits for a second. 1, see if you guys saw any trends with 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? Yes. Well, we really timing wise when we saw the biggest remix shift took place in late March, early April, Early part of the second quarter, that has stabilized and as we sit today, for example, non interest bearing deposits are flat Through the month of July, so we feel like at least the trends have normalized. Great.

Speaker 2

And then if you guys could give any more color just on margin, if you've seen The pace of margin decreasing is slowing down at all or any kind of guidance you can give us on that? Yes. Very similar comments on that were the biggest repricing of the book did take place in late March month of April. I'll say that we are entering here month of July or Q3 with a margin right around 4%, so still holding into the 4%. No.

Speaker 2

Monthly margin for last quarter was below 4%. So, again, while On a linked quarter basis, it may appear significant decrease. We forecasted that and signaled that and I feel pretty good about where margin is stabilizing. Thank you, guys. Appreciate the color on that.

Speaker 2

I'll step back.

Speaker 1

Thank you, Matt.

Operator

We'll now take our next question from Andrew Terrell with Stephens.

Speaker 4

Hey, good morning.

Speaker 2

Good morning.

Speaker 4

I appreciate the color there on the margin. Maybe just on the deposit cost specifically, do you have similarly the monthly or the spot Interest bearing deposit costs at the end of the second quarter. And then just overall on kind of beta commentary, I think in the past we had talked about Maybe 30%, 35% type range for deposit beta. Does that still feel like it's an achievable Beta target through the cycle or are you seeing more pressure

Speaker 2

than you would have anticipated? Well, certainly, I think we all in the industry are seeing more pressures than we anticipated or historically would have thought. Now like I mentioned in my prepared remarks, we are sitting at 22% beta through cycle, which I would Consider being extremely good still. Where it ends up is at this point, I don't think I'm going to try to Project that. But in terms of the deposit costs and where we are entering the 3rd quarter, Deposit cost is roughly around 1.45 versus 1.27 that we believe will work for the Q2 total.

Speaker 2

So 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 4% with a 4% margin here

Speaker 1

in the 3rd quarter. 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 Today is not as intense. Again, we've seen more stabilization. Now, Good. A number of Fed moves wake that back up.

Speaker 1

Our other issues in the marketplace wake that back up Possibly, but we have felt and quite frankly, 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. But quite frankly, as we move 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. So Do I expect that to occur again?

Speaker 1

Not really. But again, as Aldis pointed out, we don't really have that crystal ball.

Speaker 4

Yes, totally understood. I appreciate the color and it does feel like I guess if deposit costs are around that 145 Territory coming into the Q3 that it does feel like the pricing pressure has slowed a little bit. Maybe, Tim, I know you mentioned that maybe a little bit last quarter, but with Camber now kind of completely in the full integration done, you guys have hit the Can you just talk about how you see this fitting within the overall 2 unified build out? And then maybe an overall status update on progress You've made in the Q2 to start the year on to Unify, just the overall build out and how that plays in the

Speaker 1

Sure. No, thank you for asking. We have weekly deep assessments of our projects All related to UniFi 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 Thanks. In 2024 and just given what we've seen even here in the 1st 6 Months of this year in terms of bank client behavior, we think 2Unify is going to be incredibly important And the future of banking. So I really want to applaud our team that's leading and working to unify Because they're driving toward the kind of projected deliverables and the time frames for those deliverables that we expected And we're increasingly optimistic about the strategy and what it can do to serve small and medium sized businesses across the country.

Speaker 4

Abhinav, I think we've also discussed a little bit in the past the ability to kind of leverage some of what Building there and the work the team is doing into the core bank in terms of improving workflows or Is that something we could also see if Unify is moving to friends and family in 24? Could we see potential for Increased or improved efficiency at the core bank as a result of that as well?

Speaker 1

Yes. 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. And we're working with a challenger core that's much more fluid, flexible and low cost than what you would get from a traditional Provider and 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. So I don't see that happening in 'twenty four because We're going to live with what we've built for a while before we make such a big bet.

Speaker 4

Understood. If I could ask just one more modeling question, Aldis, on The release caught up at Camber related acquisition expenses, I think $500,000 of transaction, and $600,000 of intangible amortization. Is the $500,000 was called out a recurring item or is that more kind of one time transitory expense?

Speaker 2

No, that's one time transitory expense.

Speaker 4

Okay. Thank you.

Speaker 2

And obviously the $600,000 intangible amortization That is unfortunately with us, but given how the accounting works, but $500,000 is one sign.

Speaker 4

Got it. Okay. Thank you.

Speaker 1

Thank you.

Operator

We'll now take our next question from Andrew Liesch with Piper Sandler.

Speaker 1

Hey, guys. Good morning. Hey, good morning. Question on the CAMBA revenue, that one point $2,000,000 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 lower or Right.

Speaker 2

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're expecting.

Speaker 1

Got it. Got it. Is it fair that we had all this negative?

Speaker 2

I know we don't want to

Speaker 1

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 Tamber.

Speaker 2

Yes. What Tamber is loading through In terms of other opportunities where we see a potential fee and 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 Getting the way we're expecting it, but we do believe there is ability to continue to expand the capabilities and have full rollout ready.

Speaker 1

Got it. So is it safe to assume that maybe this 1.2 number is already captured in the guidance at

Speaker 3

least for the back half of this year?

Speaker 2

That is, yes.

Speaker 1

Okay. And then on the expense side, the guidance implies kind of a step up here is I'm just curious what will be driving that More to Unifi Investments, what's the what's driving that uptick?

Speaker 2

Yes. No, I think you hit it on the Now on the head is the Unify continued investment and expansion. Unify is what's driving that little bit of an increase in our As I mentioned, once you back out and normalize that $2,500,000 retention credit that you realized in the Q1, 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 Camber type of related items. But we do continue to expect to continue to increase our investments into Unified and double the guidance for second half.

Speaker 2

Got you.

Speaker 1

And then can you just remind us how is the balance sheet positioned right now for any additional changes in rates So that might undertake.

Speaker 2

Yes. We've as time has progressed, we've been

Speaker 3

holding down our asset sensitivity. So while we

Speaker 2

will benefit slightly here, So 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 expense rate cycle. We certainly want to be able To protect our margin on the way, rates weigh down type of environment as well. So most of the asset sensitivity has played out as far as the how we know it over. Got you.

Speaker 1

Wonderful. Thank you for taking the questions. I'll step back. Okay. Thank you.

Operator

We'll now take a question from Brett Rabatin with Hubby Group.

Speaker 1

Hey, guys. Good morning.

Speaker 2

Good morning, Dan. I wanted to start

Speaker 3

with Any additional color that

Speaker 1

you could provide on the venture capital write downs, what that was a function of and just No, the businesses that you had to take a bit of a mark on? Yes. Let me say broadly, We expect our investments to do well over time and frankly contribute to the build out of to Unifi. 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.

Speaker 1

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, But we're going to continue to take a conservative approach to the way we think about business and work hard to validate that. We're not going to address obviously any specific names in that portfolio, but Aldis, you may want to just talk broadly to Our total exposure there, and that might help answer Rick's question. Yes.

Speaker 2

In In terms of our total exposure to whether the direct equity type investment or a board called venture fund that many other banks may be part of, We have approximately $50,000,000 a little shy of $50,000,000 in terms of investments and exposure.

Speaker 1

Okay. That's helpful. And then one of the talk about the balance sheet and the funding Going forward, obviously, you used Kamber and a little more aggressive with 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?

Speaker 2

Yes. 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 and in maximizing our net income, it is goal to pay down as much The Federal Home Loan Bank advances as possible. We do like that capacity in terms of liquidity and access. So Having small amounts on balance sheet and always have that machine brief, those bills brief, so to make sure that we have access and certainly that, Again, over the last 4 months, it's 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.

Speaker 2

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.

Speaker 1

Okay. And then just lastly I wanted to clarify, I wasn't totally clear on the fee income guidance of $34,000,000 to $36,000,000 Does that Include or not include any potential improvement in the Camber revenue going forward?

Speaker 2

That's our rest of the year outlook for inclusive So all our lines of business, so including Camber, mortgage, banking, the core banking fees.

Speaker 1

But I think his question was does it include any of the And the answer is no. We've just taken our expected run rate Based on what we saw coming in the Q2. Okay. And 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.

Speaker 1

Yes. I'm curious if you've had anybody reach out to you or if you're hearing any early rumblings of maybe some

Speaker 2

deal activity at some point

Speaker 1

in the next few quarters. I'm not going to speak to specific conversations. We're always Any conversations, candidly, some interested in buying, others interested in selling. And I would say in terms of our own view around acquisitions, we're really in a capital building mode And 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 The question is around where the economy might go and I think it will set us up nicely for 2024 with a lot of optionality.

Speaker 1

Okay. That's great color. Appreciate it. You bet. You bet.

Speaker 1

Thanks for the questions.

Operator

Thank you. And 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.

Speaker 1

Thank you, Anna. 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 and knock on wood. We won't see any more kind of dramatic action in the marketplace.

Speaker 1

Criticized assets actually came down in the quarter and we feel very good about the quality of the loan portfolio and its performance Our ability to resolve issues quickly when they do present themselves and again well positioned for a solid second half of the year. So thanks everyone for your questions and your time today. Have a good day. Bye now.

Operator

And 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.

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Earnings Conference Call
National Bank Q2 2023
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