Q2 2023 National Bank Holdings Corp Earnings Call
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.
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 and deposits.
Capital net interest income noninterest income margins allowance taxes, 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 it provides useful information for investors reconciliations.
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 Dot National Bank Holdings Dotcom.
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 thank.
Thank you Ana good morning, and welcome to the National Bank Holdings second quarter 2023 earnings call I'm joined by oldest Perkins, our Chief Financial Officer.
We delivered solid earnings for the quarter, representing a year to date increase of $34 $1 million or 88% over prior year same period earnings our core earnings engine remains strong and adjusting for the impact of investment valuations met our expectations our credit.
Quality is excellent and our core deposits grew 29% annualized during the second quarter with a common equity tier one ratio of 11.8.
8% and ample liquidity, we continue to serve as a source of strength in our markets and on that note I'll turn the call over to all the oldest alright, well. Thank you Tim and good morning.
Thank you for joining our earnings call this quarter for.
For the second quarter 2023, we reported net earnings of $32 6 million or 85 per diluted share.
The closing and integration of the Camber acquisition has gone extremely well and it has.
Already is contributing nicely to our financial results with core deposits growing $539 million this quarter or 29% annualized.
On a year over year basis, we have grown our quarterly pre provision net revenue by $14 5 million or 49%.
Given by strong organic balance sheet growth Bell executed acquisitions, and there's always strong discipline on expenses.
We continue to be pleased with the organic loan growth. Our teams have generated during the second quarter. Our loan balances grew three 8% annualized and on a year to date basis, our loan growth has been five 4% annualized.
Entering the second half of 2023, our loan pipelines are strong which should allow us to achieve our full year loan growth guidance of mid to high single digits.
As I previously mentioned, our core deposit balances grew $539 million during the quarter, which allowed us to pay down the more expensive FHL be debt and bring our loan to deposit ratio down to 91%.
During our first one.
First quarter's earnings call, we mentioned that market conditions are demanding more aggressive deposit pricing and that is reflected in this quarters cost of deposits.
Nevertheless, our total deposit beta to date through this cycle remains quite low at 22%.
Fully taxable equivalent net interest income for the fourth quarter came in at $91 $2 million down five $1 million from the prior quarter driven by higher cost of deposits.
The second quarter as new loan originations of $362 million came in at an average weighted yield of eight 2%, which resulted in our loan book yield increasing 24 basis points to 615%.
The resulting net interest margin was 4.07% and we project them to dip slightly below 4% for the second half of 2023.
In terms of our asset quality remained strong with just two basis points of annualized net charge offs and 1.25% allowance to total loans.
This quarter's provision expense covered new loan growth nominal charge offs and supported the slight increase in the reserve requirements based on the seasonal model macroeconomic outlook changes.
Total noninterest income for the second quarter was $13 $8 million.
Included in this quarter's results was $4 $1 million in impairments related to our venture capital investments.
This was as a result of our quarterly equity investment the assessment process process, where we review the financial performance and market dynamics underlying our investments.
Excluding this impact our core banking fees grew $3 $3 million versus the prior quarter with an impressive 89% annualized.
Service and Bankcard income increased $797000 on a linked quarter basis and $1 million over the same quarter last year.
Other banking income increased $2 $5 million on linked quarter basis, mainly driven by camber fees and pick up in our mortgage banking income.
Looking ahead for the second half of 2023, B project noninterest income to be in the range of 34% to $36 million.
Noninterest expense for the second quarter totaled $61 million, which was effectively flat with the prior quarter. Excluding the first quarter's one time $2 $5 million payroll tax credit benefit.
<unk> continued to be well control and for the second half of 2023, we are projecting non interest expense to be in the range of $123 million to $125 million.
Finally, our capital ratios remained strong at 11.08% common equity tier one ratio and 91, 5% tier one leverage ratio and.
And we maintain sufficient excess excess capital to provide for various strategic options.
With that I'll turn it back to you. Thank you all of this we remain focused on earning the full relationship of our clients are focused on deposit growth in Treasury management is not new to us in fact of course strange we operate with zero broker deposits and a high level of noninterest bearing deposits with regard to Craig.
We have a comparatively low CRE exposure and we continue to build and manage a diversified and granular loan portfolio.
Finally, we operate in attractive markets that we believe will support tremendous growth opportunities for NBA <unk> and on that note and we are ready to open up the line for questions.
Yes, Sir Thank you and if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
And once again that is star one if you would like to ask a question.
And well now take our first question from Jeff <unk> with D. A Davidson.
Hi, This is Brett Thompson on for Jeff I was wondering if you good morning, a bit more color on that.
Good morning, I was wondering if you could provide a bit more color on the $24 million increase in M. P. H this quarter kind of what loan segment or segments is that increase coming from.
From several borrowers borrowers are 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 not on nonaccrual that may be impacted.
Yes sure very.
Very good question look the nonaccrual increase was driven really by one asset base lending base relationship and we believe we've already adequately reserved for any potential loss exposure. There. So look it's being well managed it was asset base, we felt comfortable with our advanced <unk>.
But as we've historically done we're going to be aggressive on dealing with any emerging problems, yes, Brett I would add that when looked at on total criticized loans.
<unk> actually came down this quarter. So this loan had been accounted on our radar for a period of time already.
So again already adequately reserved for.
I expect it to be resolved if not third quarter by the end of the year.
Great. Thank you for that and then just.
Ask one more you guys touched on it a bit and we're more in the remarks, but.
Just to revisit it the increase in deposits, where those largely from the camber acquisition and if so should we assume that those deposit transfers are largely done.
And then lastly, just doesn't 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.
Well certainly the last part of that question will depend on the loan growth and deposit.
Growth in behavior, certainly deposit fight for deposits has been intense over the last several months, but.
I'll answer first part of the question, yes. Good chunk is Campbell related we will not provide more detailed guidance just to keep ourselves. It gives us give ourselves flexibility in how we manage balance sheet for that matter the sort of the camera fees. We will now provide more guidance on forward basis, either just to give ourselves the ability to manage the balance sheet.
The flow of that program without jeopardizing our competitive advantage.
And I would add one we're not going to provide specific guidance obviously we.
We've got the flexibility to hold.
The larger levels of non broker deposits from camber, 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.
Great. Thank you.
Thank you for your questions.
Well now take our next question from Kelly Motta with K B W.
Hi, good morning, guys.
Kelly your voices.
Yeah.
Hey, sorry, this is Matt on for Kelly.
Wonder if we could just hit on noninterest bearing deposits for a second.
I wanted to 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 noninterest bearing deposits.
Yes.
Timing wise, what we saw.
And the biggest <unk> shift took place in late March early April was I'll call. It.
Early part of the second quarter that has stabilized and as we sit today for example, our noninterest bearing deposits are flat.
Through the month of July .
So we feel like at least the trends have normalized.
Alright, Great and then if you guys could give any more color just on margin.
If you've seen the pace of margin decreasing slowing down at all or any kind of guidance you can give us on that.
Yes.
Actually very very similar comment on that or what are the biggest sort of pricing of the book did take place in late March and month of April I'll say that VR entering here month of July or third quarter with a margin right around 4%. So it's still holding into the 4%.
No.
No monthly margin for last quarter was below 4% so again.
On a linked quarter basis and made it may appear significant decrease.
We forecasted that and signaled that.
Filled with feel pretty good about where margin is stabilizing.
Thank you guys appreciate the color on that I'll step back.
Thank you Matt.
Well now take our next question from Andrew <unk> with Stephens.
Hey, good morning.
Good morning.
Aldis I appreciate the color there on the on the margin.
Maybe just on the deposit costs, specifically do you have.
Similarly, the <unk>.
Monthly or the spot interest bearing deposit costs.
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 does that still feel like it's an achievable kind of beta target through the cycle or are you seeing more pressure.
Then you would have anticipated.
Well certainly I think we all in the industry are seeing more pressures than we anticipated historically would've thought now.
Mentioned in my prepared remarks, we are sitting at 22% data through cycle.
Consider being extremely good.
Phil.
It ends up is at this point I don't think I'm going to.
Try to <unk>.
Project at.
But in terms of the deposit costs and where we are entering the third quarter.
Deposit costs.
Is it roughly around 1.45 versus $1 seven that we've award for the second quarter total. So it is certainly higher but as I mentioned again the margin the other side of the earning asset side more than offsetting more than offsetting but offsetting that and we are entering 4% with a 4% margin here in third quarter.
Yeah, 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 to today is not as intense.
Again, we've seen more stabilization now could a number of fed moves wake that back up or.
Our other issues in the marketplace like that back up possibly but 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 see ourselves as having a lot of discipline there.
We really believe in the strength of our core deposits.
Quite frankly, as we move through the second quarter.
We just saw bank and nonbank competitive pricing forced us to move at a rate that we wouldn't have expected. So do I expect that to occur again, not really but again as aldis pointed out.
We don't really have that crystal ball.
Yes totally understood I appreciate the color and it does feel like I guess.
The costs are around that 145 territory coming into the third quarter than it does feel like the pricing pressure has slowed a little bit.
No.
Maybe Tim.
I know you mentioned that maybe a little bit last quarter, but with camber now kind of completely in the phone and integration done you guys have hit the ground running can you just talk about how you see this fitting within.
The overall to unify build out and then maybe an overall status update on progress you've made in the second quarter to start the year on to unify.
Just the overall the overall build out and how that plays into the bank.
Thank you thank you for asking.
We have weekly deep assessments of our projects all related to unify 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 will be in friends and family testing.
In 2024 and.
Just given what we've seen even here in the first six months of this year in terms of Av.
Bank client behavior, we think to unify is going to be incredibly important in the future of banking so.
I really want to applaud our team, leading and working to unify because theyre driving toward the kind of projected deliverables and the timeframe is for those deliverables that we expected and we're increasingly optimistic about the strategy and what it can.
What it can do to serve small and medium sized businesses across the country.
I think we will also discuss a little bit in the past the ability to kind of leverage some of what you're building there and the work the team is doing.
Into the core bank in terms of improving workflows or efficiency is.
Is that something we could also see if.
Unifi is moving to friends and family and 24 could we see potential for.
Increased or improved efficiency at the core bank as a result of that as well.
Sure.
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.
We're working with the 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 lift with it and believe that 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 we're going to live with what we've built for a while before we make such a big.
Beth.
Understood.
If I could ask just one more.
Modeling question Aldis.
The release called out the camera related acquisition expenses, I think 500000 of transaction.
600000 of intangible amortization is the 500000 was called out a recurring item or is that more kind.
Kind of onetime transitory expense.
No thats onetime transitory expenses.
And obviously thank you.
$600000 intangible amortization.
Unfortunately, with us, but given how the accounting works, but.
About 500000 is one one time.
Got it okay. Thank you.
Thank you.
We will now take our next question from Andrew Liesch with Piper Sandler.
Hey, guys good morning.
Good morning.
A question on the camera revenue that one 2 million that came on when you.
Are you guys close the deal at the beginning of April was that in line with your expectations or was that a little higher a little lower or just right.
Now for the amount of.
Call it excess deposits that we didn't keep that were flowing through there that's exactly in line, where we expected.
Okay got it got it and then is it fair to add all of this.
No we don't want to 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 camber, what Tim was alluding to is 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 in hitting our financials the way we expected them.
It's hitting the way we expecting at them, but we do believe there is ability to to continue to expand the capabilities I've got Florida out revenues.
Got it.
Is it safe to assume that maybe this one two number is already captured in the guidance at least for the back half of this year.
Yes.
Okay and then.
On the expense side, the guidance implies kind of a step up here is I'm, just curious what would be driving that.
Mark to unify investments what's the.
What's driving that uptick.
Yes, no I think.
You hit it on them now and ahead is to unify continued investment and expansion to Unifi is.
It is whats driving that a little bit of an increase in our expense guidance.
I mentioned once you back out the normalized at $2 5 million.
Pension credit to be realized in the first quarter, our expenses are more or less flat on a linked quarter basis.
I would say that is our current run rates, even though there's quite a bit of noise between.
<unk> processing fees being better in these onetime camera type of related items.
But we do continue to expect to continue to.
To increase our investments and to unify and double double is others in the guidance for second half.
Gotcha.
And then can you just.
Minder.
How is the balance sheet positioning right now for any additional changes in rates.
It might undertake.
Yes.
As time has progressed we've been.
Closing down our asset sensitivity so wildly.
Benefit slightly here.
The fed moves next week.
Not materially anymore, because again as we are nearing the top of the range is at least what the future side, indicating of the fed rate cycle.
We want to be able to protect our margin in a way rates way down type of environment as well so.
Most of the asset sensitivity has played out as far as how we model it.
Gotcha wonderful. Thank you for taking the questions I'll step back.
Okay. Thank you.
We will now take a question from Brett Robinson with have secret.
Hey, guys good morning.
I wanted to start on.
Good morning wanted to start with any additional color that you could provide on the venture capital write down what that was a function of and just 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.
Frankly contribute to the build out of to unify.
I think most know that tech valuations are very challenging in the current market and then the absence of fresh capital raises its pretty difficult to nail down those valuations.
Okay.
Candidly.
I'll, probably get in trouble for saying this but it feels like at this point in the cycle. It is as much art as it is science, but we're going to continue to take a conservative approach to the way, we think about the business and work hard to validate that we are not.
Not.
Going to address obviously any specific names in that portfolio, but all of this you may want to just talk broadly to our total exposure there.
And that might help answer the question.
In terms of our total exposure to whether it's direct equity type investment or boardroom.
Hello venture fund that many other banks might be part of.
We have.
Approximately $50 million little shy of $50 million in terms of investment and exposure.
Okay.
That's helpful and then wanted to talk.
Talking about like the balance sheet and the funding going forward, obviously you used camera.
We're a little more aggressive with deposit to lower the <unk> 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.
Youre funding sources from here and how you manage that.
Yes no.
Absolutely right I mean that is if you look at the.
Items on our balance sheet that by far is the most expensive cost of funding in terms of maximizing either.
Net income.
It is goal to pay down as much.
The federal home loan bank advances as possible.
Do like dock capacity in terms of liquidity and access so having small amount on balance sheet and always have that.
Machine.
Those fields, Greece, so to make sure that we have access and certainly that again over the last four months has 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 so we're not necessarily looking to maybe pay down to the last penny, but directionally, we continue to look for ways.
To expand our deposit relationships and pay down the more expensive debt.
Okay.
And then just lastly, I wanted to clarify I wasn't I wasn't totally clear on the.
The fee income guidance of $34 million to $36 million does that include or not include any potential improvement in the camera revenue going forward.
For the rest of the year outlook for inclusive all our lines of business, including Camber mortgage banking core banking fees, but I think his question was does it include any of the optimization of camber and the answer is no. We've just taken our expected run rate.
Based on what we saw coming in the second quarter.
Okay.
And then if I could sneak in one last one Tim I'm curious I've had a few banks tell me that they.
They are starting to have a few conversations.
I'm curious if you've had any better you reach out to you or if you're hearing any early rumblings of maybe some deal activity at some point in the next few quarters.
Yes.
I'm not going to speak to specific conversations we're always in 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.
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 to questions around where the economy might go and.
And I think it will set us up nicely for two.
2024, with a lot of Optionality.
Okay, that's great color I appreciate it.
You bet you bet thanks for the questions.
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.
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 peers.
Appears to be stabilizing and knock on wood, we won't see any more kind of dramatic action in the marketplace credit side as criticized assets actually came down in the quarter and we feel very good about the quality of the loan portfolio and its performance and 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.
This concludes today's conference call, if you'd 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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