National Bank Holdings Corporation (NYSE:NBHC) Q3 2023 Earnings Call Transcript

National Bank Holdings Corporation (NYSE:NBHC) Q3 2023 Earnings Call Transcript October 25, 2023

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. 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 noninterest 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: 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 continue 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. And on that note, I’ll turn the call over to Aldis.

Aldis Birkans: 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%. And 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 $89.4 million, a slight decrease to the second quarter and an $18.9 million increase over the last year’s third quarter. The result in net interest margin for the quarter was 3.92%, and we project NIM to be in the range of 3.8% to 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 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 to 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 noninterest 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 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 noninterest income to be around $16 million, a linked quarter decrease, mostly driven by the seasonal slowdown in mortgage-related income.

Noninterest 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 in 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 quarter. The fourth quarter’s total noninterest expenses are projected to be in the range of $60 million to $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: 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 are 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.

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Q&A Session

Operator: [Operator Instructions] We’ll take our first question from Jeff Rulis from D.A. Davidson.

Jeff Rulis: 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?

Aldis Birkans: It was with a bigger pop at the end of the quarter, but we kind of continue to 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: Okay. And strategy-wise, I guess, pending deposit success that expectation would be to further reduce that? How do you feel on liquidity?

Aldis Birkans: Well, in terms of liquidity, we feel very well. I mean, With the addition of Cambr as a source of our 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 stress test 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.

Tim Laney: And it is noteworthy, Jeff, on a related note that we operate with zero broker deposits. So — in fact, that’s historically been the case and certainly the case through the cycle.

Jeff Rulis: And Aldis, I missed the full year guide on loan growth, I may have…

Aldis Birkans: Yes. The full year guidance has been single digits, mid- to high — and we are, as I mentioned, 4.8% year-to-date, but the fourth quarter is looking quite strong with a couple of loans pushing here in the fourth, and we certainly look to be above 5%.

Jeff Rulis: 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: Yes. The September margin was 1.72% — I’m sorry, sorry, that’s our cost of deposits. September margin was 3.90%.

Jeff Rulis: 3.90%. Okay. Got it. Just jumping to credit for a minute. It sounds like Tim, you’ve got some nice reductions coming in the fourth quarter. I can imagine, is there some progress on some of the nonaccruals that were brought forward in the second quarter?

Tim Laney: That’s exactly right. That’s exactly right.

Jeff Rulis: 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: Yes. I would say it’s probably given where we’re at into the fourth quarter, probably best we wait and report on that on the 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 ’24 that we’re going to benefit from having a 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.

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

Tim Laney: There was.

Operator: We’ll next go to Kelly Motta with KBW.

Kelly Motta: 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 market, if there’s any — if it’s broad-based across kind of like all the markets you’re in or if you’re seeing any sort of trends.