National Bank Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 25, 2024

There are 7 speakers on the call.

Operator

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2024 First Quarter Earnings Conference Call. My name is Shelly, and I will be your conference operator for today. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to Emily Goodin, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Shelley, and good morning. We will begin today's call with prepared remarks, followed by a question and answer session. I would like to remind you that this conference call will contain forward looking statements, including, but not limited to, statements regarding the company's strategy, loans, deposits, capital, net interest income, non interest income, margin, 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.

Speaker 1

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 dotnationalbankholdings.com.

Speaker 1

It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman, President and CEO, Mr. Tim Laney.

Speaker 2

Thanks, Emily. Good morning and thank you for joining us as we discuss National Bank Holdings' 1st quarter results. I'm joined by our Chief Financial Officer, Aldis Birkett. We delivered quarterly earnings of $0.82 per diluted share and a return on tangible common equity of 15.14%. Credit remains strong with 0 basis points of annualized charge offs.

Speaker 2

We experienced a slow start with loan production early in the quarter with business clients deferring action in anticipation of the Federal Reserve lowering interest rates. Once it became clear that rates were not coming down in the near future, client activity picked up and we have a very strong pipeline for the 2nd quarter. We grew our core deposits 6.8% over the Q1 of 2023, while preserving our low deposit beta across this entire rate cycle. Expenses were well managed, especially in light of the fact that this year we are incurring over $18,000,000 of expense related to the amortization of our investments to date into Unify. And I'll cover a more detailed update on 2Unify after Aldis takes us through the quarter.

Speaker 2

Aldis?

Speaker 3

All right. Thanks, Tim, and good morning. During this call, I will cover the financial highlights for the Q1 as well as touch on our guidance for 2024. And just as a reminder, our guidance does not include any future interest rate policy changes by the Fed. Turning to the financial results.

Speaker 3

For the Q1, we reported net income of $31,400,000 or $0.82 of earnings per diluted share. The first quarter's return on tangible assets was 1.4% and the return on tangible equity was 15.1%. During the quarter, our loan balances decreased $130,000,000 or 1.7 percent. And as Tim already discussed, the feedback we have received from our commercial clients is that many projects and funding needs were delayed with the hope of achieving lower funding costs. This was especially evident early in the year when the interest rate cut expectations were still quite high.

Speaker 3

Similarly, our commercial lines of credit utilization ended the quarter at historically low levels. As we entered the 2nd quarter, our pipelines are quite strong and we expect to meet our full year loan portfolio growth guidance of mid single digits. Fully taxable equivalent net interest income for the quarter came in at $85,700,000 The linked quarter decrease was primarily driven by accelerated loan fee income of $2,900,000 recognized in Q4 and one less day in the Q1. Net interest margin in the Q1 was 3.78%. Our new loan originations during the quarter were at an average rate of 8.8% and continue to favorably benefit our earning asset yields.

Speaker 3

Our overall deposit beta, this rate cycle to date is 37.5% and the pressure on deposit pricing is abating. Looking ahead for the rest of 2024, we project our NIM to settle in the mid $0.03 Deposit balances during the quarter grew $327,000,000 on a spot basis and $90,000,000 on an average balance basis. This quarter we benefited from seasonal tax inflows in the Camber platform deposits. As such we paid off all of our FHLB borrowings as these deposits are more favorable to our funding costs. In terms of our asset quality, it remains strong.

Speaker 3

During the quarter, we incurred 0 basis points in net charge offs and recorded no provision expense. We increased our overall allowance to Additionally, we still hold $26,200,000 in marks against our acquired loan portfolio, which equates to approximately 35 basis points if applied across the whole loan portfolio. Total non interest income for the Q1 was a strong $17,700,000 or a $1,600,000 increase from the prior quarter. And while we saw a seasonal slowdown in service charges and bank arc fees, we are gaining momentum from our fee diversification efforts, driven by SBA loan gains on sale, trust income and camber fees. This quarter, we also benefited from a $600,000 gain on the sale of a banking center building.

Speaker 3

For the rest of 2024, we project to meet our full year guidance for the fee income of $67,000,000 to $72,000,000 Non interest expense for the quarter totaled $62,800,000 and included elevated payroll taxes. The U related expense this quarter was approximately $3,000,000 and we continue to be on budget and on plan with our targeted rollout dates. Looking ahead for the rest of 2024, we see our non interest expenses trending towards our original full year guidance of $253,000,000 to $258,000,000 In terms of capital, we continue to grow our excess capital with a TCE ratio ending the quarter at 9.2% and a Tier 1 leverage ratio coming in at 10%. Tangible book value per share grew 2.4% ending the quarter at $23.32 Tim, with that, I will turn back to you.

Speaker 2

Thanks, Aldis. Well, solid earnings resulted in tangible book value per share increasing $0.55 during the quarter and our common equity Tier 1 capital ratio totaled 12.35% at quarter end. Now turning to 2Unify, we remain highly enthusiastic about the progress being made in the build out of a platform, a banking platform that we believe can change the way small and medium sized businesses access U. S. Banking.

Speaker 2

Additionally, we're both building tools within 2Unify for these businesses that simply do not exist today. We believe 2Unify will save business owners time and money and meaningfully reduce stress in their lives. All project work is tracking the target and we expect to be in Release 1 user testing by the Q4 of this year. Shelly, on that note, let's open up the call for questions and discussion.

Operator

Thank And our first question is coming from Jeff Rulis with D. A. Davidson. Your line is open.

Speaker 4

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

Speaker 3

Yes. This is Aldis. Jeff, hi, good morning. Obviously, we've looked at their seasonal patterns in the years before and do expect some of this to come out in rest of the April and coming months here in Q2. But there is a certainly a certain level of that will be sticky as well.

Speaker 3

The growing average balance

Speaker 2

is across that platform is pretty impressive. So we expect that trend to continue.

Speaker 4

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

Speaker 3

Yes. I mean, I think as we there's hard to give quarter to quarter. There might be fluctuations, as you mentioned, given where CAMBER or DDA is slow. It will certainly will come down to the timing of the loan growth as well. As I mentioned, we are adding loans at high 8%.

Speaker 3

That is margin accretive regardless how you fund it. So timing of that will matter too. So there is certainly we set up for tailwinds for margin to maybe shift up in Q4, but don't want to get ahead of our expectations here either.

Speaker 4

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

Speaker 3

rebounds? Yes. Well, I think certainly, again, the earning asset NII will be driven by earning asset growth. That's driven by loan growth. The Q1 certainly came in a bit lower than we expected given the lighter loan performance.

Speaker 3

So whether we make that up in going in the rest of the year is hard to tell towards the full NII guidance. But again, if you look at the loan growth from here, what does that do to earning asset growth, holding margin in the mid-37s, it will give you a pretty good estimate for the NII.

Speaker 2

I would add that current pipeline would suggest that by quarter end, if our teams deliver like I think they can, that we'll be back on plan as it relates to loan balances and then working hard to cover any NII gap from the Q1.

Speaker 3

Yes. Thanks.

Operator

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

Speaker 5

Hey, Kelly. Hi, Kelly. Thanks for the question. I apologize, I dropped off for a minute or 2 during the prepared remarks and you just alluded to the loan pipeline. I was just wondering if you could share where you're seeing the best opportunities.

Speaker 5

I appreciate the color on where new loan yields are coming on. Just any sort of color as to how pipelines are shaping up now versus this time last quarter and the mix of that pipeline?

Speaker 2

Yes. It's largely C and I, so middle market businesses across our geography. We're not we're seeing nice buildup in all of our major markets. And it probably is important to point out that part of what was going on in the Q1 is in addition to line usage being down, which frankly we're still analyzing that, talking to clients, trying to understand the drivers there. We were also selectively pruning the loan portfolio.

Speaker 2

So there are targeted industries where we are proactively reducing exposure. And so you can imagine an area like transportation that represents about 3% of our total book, where we're actually reducing that exposure just given the state of that industry. So we're certainly not adding new clients in that space. So core manufacturing is strong, service related businesses are strong. I can't really speak to a lot of activity in commercial real estate because that's just not a focus in this market.

Speaker 2

So Kelly, I hope that helps with a little color.

Speaker 5

Yes, certainly. That's very helpful. And maybe I love the color that to Unify, you have version 1 ready for testing in Q4. I know it's going to take some time for that to really shine through results. But as we start to think about what this platform could do, are you thinking about this as more of a fee opportunity?

Speaker 5

Will it add to balance sheet growth? Just wondering kind of how to frame the type of impact and it could have to MBHC even if we're not ready to quantify that yet?

Speaker 2

Yes. Strategically, it's a great question. Strategically, I would tell you that we should think about to unify as building a completely new business, not just a fee income generator, not a product, but a new business, a new way of banking. For our investors, we'll preserve the optionality to run the core bank and run to Unify. But there very well could be a time where the reality is that to unify becomes such a force and that it's doing business in such a different way that it moves out and lives its own life.

Speaker 2

I've got to say, the beauty of building it in conjunction with the rest of the bank is we are already seeing really interesting technical cross over that is benefiting and will benefit the bank in terms of better client experience, saving us money. And probably the most important example in this environment is just the level of security features that are being built into to Unify that are largely transferable over to the core bank. Then everybody is talking about artificial intelligence and so on and so forth. And what I would suggest is that AI is only as good as its data sources and I couldn't be more impressed with the data lakes that our teams are building. In terms of functionality, this is an API first architecture.

Speaker 2

So the beauty of being able to adjust with that flexibility is unlike anything you really find in the vast majority of the banking industry today. It will allow us to be more nimble and responsive to clients and again do business in ways that haven't previously been done.

Operator

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

Speaker 3

Good morning.

Speaker 6

Good morning, guys. Thanks for taking the questions. Just a question on the Canberra deposits that came in, in the quarter. Just curious what the funding difference might be between those and the FHLB borrowings that you paid off?

Speaker 3

Yes. Again, we don't necessarily talk to specific pricing, but I'll just say that if these deposit balances persisted at the same cost versus what we paid FHLB, it would be the difference would be a couple of $1,000,000 benefit to annualized to our bottom line.

Speaker 6

Got it. All right. That's helpful. And then, Tim, what's the thought process on additional M and A right now? How are conversations with prospective targets going?

Speaker 6

I know you did the Camber deal last year, the other deals not too far in the distant past. But just curious on your outlook for additional M and A right now.

Speaker 2

Well, activity has certainly been high. And we have been clear in what we're targeting, which would be institutions in that $1,000,000,000 to $3,000,000,000 range in growth markets, ideally in growth markets that we know and understand. And that's where we've been spending our time.

Speaker 6

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

Speaker 2

You bet. Thanks.

Operator

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

Speaker 4

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

Speaker 2

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

Speaker 4

And that's a percent of loans, Tim, that 50 basis points? Yes. Okay, great. And then one more follow-up. Just the you touched on it briefly, but the service and card revenues linked quarter down it, card makes some sense, but just wanted to see what was potentially that had been a kind of a hard charging line item and just wanted to see what those within those 2 if there were any changes or seasonality impacts that hope to see those come back?

Speaker 3

Yes. That's Q1 is all seasonality for us for both of those line items. So, yes, I

Speaker 2

expect if you compare quarter Q1 last year to Q1 of this year, you would see that dip. We've seen it for years. Right. So we do expect that to come back here in Q2 and already seeing good activity in bank card starting month of March into here in April. It prompts another thought we should share because a lot of our card activity relates to personal banking relationships.

Speaker 2

And another encouraging point around deposits is we started to see a nice positive movement in personal banking deposits as we closed out the quarter and moved into the second. So that was certainly refreshing to see and that will contribute to additional fee income over time as well.

Speaker 4

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

Speaker 3

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

Speaker 4

Yes, the full year non interest income guys is great. So appreciate it.

Speaker 3

Yes, of course. Thank you.

Operator

Our next question is coming from Kelly Motta with KBW. Hey, thank you so much for letting me jump back into the queue.

Speaker 5

I appreciate the color on M and A and understanding that maybe you want to keep some dry powder for that as well as some of the other initiatives you're working on. I did see that capital did build very nicely and you guys have been active on the buyback in the past. Just wondering how you guys are approaching that method of capital deployment?

Speaker 2

We're probably discussing

Speaker 6

buyback action

Speaker 2

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

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 2

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

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 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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Key Takeaways

  • National Bank reported $0.82 EPS in Q1, with net interest income of $85.7 million and a 3.78% net interest margin, while core deposits grew 6.8% year-over-year.
  • Credit quality remained strong with zero annualized charge-offs, no provision expense, and an increased allowance including $26.2 million of marks on acquired loans.
  • Loan balances fell 1.7% as clients delayed borrowing amid rate uncertainty, but management expects mid single-digit loan growth for 2024 given a robust pipeline of new originations at an 8.8% average yield.
  • The bank is advancing 2Unify, its API-first digital platform for small and mid-sized businesses, with Release 1 user testing slated for Q4 2024 to drive future growth and fee diversification.
  • Capital remains ample—Tier 1 leverage at 10% and TCE at 9.2%—and the company is evaluating share buybacks and potential dividend hikes, while guiding full-year non-interest income of $67–72 million and expenses of $253–258 million.
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Earnings Conference Call
National Bank Q1 2024
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