Q1 2024 National Bank Holdings Corp Earnings Call

Participants

Emily Gooden; Director of Investor Relations; National Bank Holdings Corp

G. Timothy Laney; Chairman of the Board, President, Chief Executive Officer; National Bank Holdings Corp

Aldis Birkans; Chief Financial Officer; National Bank Holdings Corp

Jeff Rulis; Analyst; D. A. Davidson & Co.

Kelly Motta; Analyst; Keefe, Bruyette & Woods, Inc.

Andrew Liesch; Analyst; Piper Sandler Companies

Presentation

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.
(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to Emily Gooden, Director of Investor Relations. Please go.

Emily Gooden

Thank you, Sally, 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, loan deposits, capital, net interest income, noninterest 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 US 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, Chairman, President and CEO, Mr. Tim Laney.

G. Timothy Laney

Thanks, Emily. Good morning and thank you for joining us. As we discuss National Bank Holdings First Quarter Results. I'm joined by our Chief Financial Officer, Aldis Birkans. We delivered quarterly earnings of $0.82 per diluted share and our return on tangible common equity of 15.14%. Credit remains strong with zero basis points of annualized charge-offs. 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 second quarter, we grew our core deposits 6.8% over the first quarter 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 million of expense related to the amortization of our investments today into UniFi. And I'll cover a more detailed update on to unify after all this takes us through the quarter also.

Aldis Birkans

Thanks, Tim, and good morning. During this call, I will cover the financial highlights for the first quarter 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, for the first quarter, we reported net income of 31.4 million 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 million or 1.7%. And as Tim already discussed, the feedback we have received from our commercial clients is that many projects and funding needs were delayed, but the hope of achieving lower funding costs. This was especially evident early in the year when the interest rate cut expectations are still quite high. Similarly, in our commercial lines of credit utilization ended the quarter to quarter at historically low levels.
As we entered the second quarter, our pipelines are quite strong and we expect to meet our full year loan portfolio growth guidance, ultimate single digits fully taxable equivalent. Net interest income for the quarter came in at $85.7 million. The linked quarter decrease was primarily driven by accelerated loan fee income of $2.9 million recognized in Q4 and one less day in the first quarter. Net interest margin in the first quarter 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. 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 $27 million on a spot basis and $90 million 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 remained strong during the quarter, we incurred zero basis points in net charge-offs for the quarter note and recorded no provision expense. We increased our overall allowance to total loan ratio to 1.29%, and I have built sufficient reserves to support any nonaccrual loans. Additionally, we still hold $26.2 million in marks against our acquired loan portfolio, which equates to approximately 35 basis points of loan loss coverage if applied across the whole loan portfolio.
Total noninterest income for the first quarter was a strong $17.7 million or a $1.6 million increase from the prior quarter. And while we saw a seasonal slowdown in service charges and bank card fees, we are gaining momentum from our fee diversification efforts driven by SBA loan gain, a loan gain 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 for the rest of 2020 for the project to meet our full full year guidance for the fee income of $67 million to $72 million noninterest expense for the quarter totaled 62.8 million and included elevated payroll taxes for US related expense. This quarter was approximately $3 million, 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 noninterest expenses trending towards our original full year guidance of 253 to 258 million.
In terms of capital, we continue to grow our excess capital with a Europe TCE ratio ending the quarter at 9.2% and a Tier one leverage ratio coming in at 10%. Tangible book value per share grew 2.4%, ending the quarter at $23.32. And with that, I'll turn back to you.

G. Timothy Laney

Thanks to all this while solid earnings resulted in a tangible book value per share increasing $0.55 during the quarter, and our common equity Tier one capital ratio totaled 12.35% at quarter end.
Now turning to UniFi. We remain highly enthusiastic about the progress being made in the build-out of a platform of banking platform that we believe can change the way small and medium-sized businesses access US banking. Additionally, we're both building tools within to unify for these businesses. That simply do not exist today, we believe to unify will save business owners time and money and meaningfully reduce stress in their lives. All project work is tracking to target and we expect to be in release one user testing by the fourth quarter of this year.
Shelly, on that note, let's open up the call for questions and discussion.

Question and Answer Session

Operator

(Operator Instructions) Jeff Rulis, D.A. Davidson.

Jeff Rulis

Good morning and 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 cloud, it sounded tax-related, but just wanted to get a sense for the stickiness of those staying on balance sheet.

Aldis Birkans

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

G. Timothy Laney

The growing average balances across that platform is pretty impressive. So we expect that trend to continue.

Jeff Rulis

Okay. And then kind of turning to the margin, then you got the mid 370 and guide, I guess given that a pretty big FHLB, it dropped off if you look at kind of average interest-bearing rates there. And would you think about and a building of loan pipeline, I guess I'm kind of looking more towards the back half of the year. What do you lean on in terms of direction of margin? Sounds like some pretty good tailwind that just wanted to kind of check in on kind of full year expectations?

Aldis Birkans

I mean, I think as a that there's hard to go quarter to quarter. There might be fluctuations as you mentioned, given where Camber or DDA slow on in both certainly will come down to the timing of the loan growth as well. As I mentioned, the we are adding loan to high 8%. That is margin accretive regardless how you funded on So of timing of that will matter to. So there is certainly will be set up for tailwinds for margin to maybe shift up in Q4, but I don't want to get ahead of our expectations here either.

Jeff Rulis

And on the related front on that, and I I think you had a guide last quarter, you are you kind of at this point kind of reassessing or should we think about that level or maybe to the margin company? And any thoughts on the NI levels? And can those, I guess, recover before maybe the margin rebounds?

Aldis Birkans

Yes. But I think certainly, again, the earning assets and I will be driven by earning asset growth. That's driven by loan growth in the first quarter certainly came in a bit lower than we expected given the lighter loan performance. And so whether we make that up in going in the rest of the year is hard to tell the towards the full NI 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 30 sevens, it will give you a pretty good estimate for the for the and I would add that the current pipeline with suggested by quarter end.

G. Timothy Laney

Our teams deliver like I think they can. That will be back on plan as it relates to loan balances and then working hard to cover any in our GAAP from the first quarter.

Jeff Rulis

Got it. Okay. Thank you.

Operator

Kelly Motta, KBW.

Kelly Motta

Caroline, thanks, for the thanks for the question on. I apologize. I dropped off for a minute or two during the prepared remarks, and you just alluded to on the loan pipeline. I was just wondering if you could share where you're seeing the best opportunities. And I appreciate the color on where new loan yields are coming on. And just just any sort of color as to how pipelines are shaping up now versus this time last quarter on? And that's the mix of that pipeline?

G. Timothy Laney

Yes, it's largely in our C&I middle market businesses across our geography. We're not we're seeing nice build up in all of our major markets and why it probably is important to point out that part of what was going on in the first quarter in addition to line usage being down, which we frankly, we're still analyzing that talking to clients trying to understand the drivers there. We were also selectively pruning the loan portfolio. So there are targeted industries where we are proactively reducing exposure.
And so you can imagine I would 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. So Kelly, I hope that helps with a little color.

Kelly Motta

Yeah. Certainly, that's very helpful. I love that of color that to unify, you have Version one ready for testing in Q4. I know you know, it's going to take some time for that to really shine through results. But so you start to think about what this platform could do. You know about this is more of a fee opportunity. Will it add to us, you know, balance sheet growth. Just wondering kind of how to frame type of impact and could have to MEHC even if we're not ready to quantify that yet.

G. Timothy Laney

Yes. I think it 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 the 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 on. But there very well could be a time where the reality is that to unify become such a force in that it's doing business in such a different way that, you know, it moves out and lives its own life. I've got to say.
And the beauty of building it in conjunction with the rest of the bank is we are already seeing really interesting technical crossover 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, it is just that the level of security features that are being built into to unified that are largely transferable over to the Core Bank. And then everybody is talking about artificial intelligence and 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 of our teams are building on in terms of functionality.
This is an APR first architecture. 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 have and again, do business in ways that haven't previously been done.

Kelly Motta

Awesome. Thank you so much for the color, Tim. I will step back for.

G. Timothy Laney

Thanks, Kelly.

Operator

Andrew Liesch, Piper Sandler.

Andrew Liesch

Good morning. Morning, guys. Thanks for taking the questions. Bob, just a question on the Camber deposits that came in the quarter. I'm just curious the funding difference, Mike, between might be between those and the FHLB borrowings that you paid off?

Aldis Birkans

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 book, you would be the difference would be couple of million dollar benefit to an annualized total to our bottom line.

Andrew Liesch

Got it. All right. That's helpful.

G. Timothy Laney

And then But Tim, what's the thought process on additional M&A right now on that? Have conversations with prospective targets going under the Cambridge deal after the other deals and not too far in the distant past, but just curious on your outlook for additional M&A right now, full activity has certainly been high, and we have been clear and what we're targeting which would be institutions in that one to $3 billion range in growth markets, ideally in growth markets that we know and understand. And that's where we've been spending our time.

Andrew Liesch

Got it. All right. Thanks for taking my questions.

Operator

Jeff Rulis, D.A. Davidson.

Jeff Rulis

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

G. Timothy Laney

Yes, you know, I'm 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 nonperformers 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.

Jeff Rulis

And that's a percentage of loans, Tim, that 50 basis points?

G. Timothy Laney

Yes.

Aldis Birkans

Okay, great.

Jeff Rulis

And then I have one more follow-up just to be on. You touched on it briefly, but the service and card revenues linked quarter down at card makes some sense. But just wanted to sorry, what was potentially it had been a kind of a hard charging line item and just wanted to see what those within those two, if there were any changes or seasonality impacts that hope to see those come back.

Aldis Birkans

And that's the first quarter is of all seasonality for us for both of those line items.

G. Timothy Laney

So yes, we would execute compared quarter the first quarter last year to Q1 this year. You would see that that dip we've seen it for years, right?

Aldis Birkans

So we do expect that to come back in here in the second quarter.

G. Timothy Laney

And already we're seeing good activity and bankcard 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. 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 and that was certainly refreshing to see and that will contribute to additional fee income over time as well.

Jeff Rulis

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

Aldis Birkans

Not specifically, again, it's embedded in our total fee guidance, but I'll say that, Tom, and on the markets change, right, even this morning, the rates are up quite a bit given the GDGP. 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 planned numbers and done. You know if again, if some markets doesn't really change that dramatically. We should be able to meet our planned numbers in that line item.

Jeff Rulis

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

G. Timothy Laney

Yes, of course. Thank you.

Operator

Kelly Motta, KBW.

Kelly Motta

Thank you so much for letting me jump back into the queue. I appreciate the color on that M&A and other 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 and how you guys are approaching that, that method of capital capital deployment.

G. Timothy Laney

We'll probably discuss same buyback action at as high a frequent 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 at and to that end or 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 of twice each year. And you were also frankly talking about whether or not a higher dividend at this point might be appropriate. So that's another consideration and thanks so much for the color here. I think question.

Operator

Thank you. And I am showing we have no further questions at this time. I would now turn the call back to Mr. Laney for his closing remarks.

G. Timothy Laney

Thank you, Shelley. I'll just thank those of you that ask a thoughtful questions, and I 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.