Q2 2024 National Bank Holdings Corp Earnings Call
Good morning everyone and welcome to the National Bank Holdings Corporation 2024 second quarter earnings call. My name is Maddie 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 Gooden, Director of Investor Relations.
Maddie: This is a 24-hour, 24-second quarter earnings call. My name is Maddie, 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 Gooden, Director of Investor Relations.
Emily Gooden: Thank you, Maddie, 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, non-interest income, margins, allowance, taxes, and non-interest expense. Actual results could differ materially from those discussed today.
Emily Gooden: Thank you, Maddie, and good morning. We will begin today's call with prepared remarks.
followed by a question and answer session.
Speaker Change: I would like to remind you that this conference call will contain forward-looking statements.
Speaker Change: 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.
Emily Gooden: 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 provide useful information for investors.
Speaker Change: Actual results could differ materially from those discussed today.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: In addition, the call today will reference certain non-GAAP measures which National Bank Holdings Corporation believes
Emily Gooden: 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.
Speaker Change: provides useful information for investors.
Speaker Change: 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.
Speaker Change: It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman, President, and CEO , Mr. Tim Laney.
Tim Laney: Thank you, Emily. Well, good morning, and thank you for joining us as we discuss National Bank Holdings' second quarter results. I'm joined by Aldis Birkans, our Chief Financial Officer. We delivered quarterly earnings of 68 cents per diluted share on the back of a 3.7% net interest margin, as well as increases in our diversified sources of fee revenue. Loans increased 8.1% annualized during the quarter, and credit quality continues to benefit from having built a diversified and granular loan portfolio. We also realized a 7.9% annualized increase in average deposits, with transactional deposits representing 87.8% of total deposits.
Tim Laney: Thank you, Emily. Well, good morning and thank you for joining us as we discuss National Bank Holdings' second quarter results.
Speaker Change: I'm joined by Aldis Birkans, our Chief Financial Officer.
Speaker Change: We delivered quarterly earnings of 68 cents per diluted share on the back of a 3.7% net interest margin, as well as increases in our diversified sources of fee revenue.
Speaker Change: Loans increased 8.1% annualized during the quarter, and credit quality continues to benefit from having built a diversified and granular loan portfolio.
Speaker Change: We also realized a 7.9% annualized increase in average deposits, with transactional deposits representing 87.8% of total deposits.
Speaker Change: Expenses were well managed, particularly in light of the investments we are making to build to unify, increases in our defenses against emerging fraud threats, and also expanding the capabilities of Canberra.
Speaker Change: We feel very good about what we're seeing and hearing in our markets, and we entered the third quarter with a solid pipeline and strong momentum.
Tim Laney: Expenses were well-managed, particularly in light of the investments we're making to build a new unified platform, increases in our defenses against emerging fraud threats, and also expanding the capabilities of Canberra. We feel very good about what we're seeing and hearing in our markets, and we entered the third quarter with a solid pipeline and strong momentum. And on that note, I'll turn the call over to Aldis. All right. Well, thank you, Tim, and good morning.
Speaker Change: And on that note, I'll turn the call over to Aldis.
Aldis Birkans: During this call, I will cover the financial highlights for the second quarter, as well as touch on our guidance for the rest of 2024, which does not include any future interest rate policy changes by the Fed. For the second quarter, we reported net income of $26.1 million, or $0.68, per diluted share. This quarter was highlighted by strong long-term growth and significant progress in reducing outstanding NPLs and NPAs. In terms of loan growth, loan funding totaled a strong $505 million, which resulted in an annualized portfolio growth of 8.1%.
All: All right. Well, thank you, Tim. And good morning. During this call, I will cover the financial highlights for the second quarter, as well as touch on our guidance for the rest of 2024, which does not include any future interest rate policy changes by the Fed.
All: For the second quarter, we reported net income of $26.1 million, or $0.68, of earnings for diluted share.
All: This quarter was highlighted by strong long growth and significant progress in reducing outstanding NPLs and NPAs.
All: In terms of the loan growth, loan fundings totaled a strong $505 million, which resulted in an annualized portfolio growth of 8.1%.
Aldis Birkans: The second quarter's loan production, combined with robust loan pipelines, puts us on a trajectory to meet the full year-long growth guidance of mid-single-digit. The second quarter's loan production was granular, with an average commercial loan funding size of $1.3 million, diversified across all of our geographies and lines of business. We also saw a stabilization and a small recovery in drawdowns of our annualized lines of credit. Fully taxable equivalent net interest income for the quarter came in at $85.3 million, fairly consistent with the prior quarter.
All: The second quarter's loan production, combined with robust loan pipelines, puts us on a trajectory to meet the full-year loan growth guidance of mid-single digits.
All: Second quarter's loan production was granular, with an average commercial loan funding size of $1.3 million, diversified across all of our geographies and lines of business.
All: We also saw a stabilization and a small recovery in drawdowns of our annualized lines of credit.
All: Fully taxable equivalent net interest income for the quarter came in at $85.3 million, fairly consistent to the prior quarter. We expect earning assets and net interest income to grow in the second half of 2024, driven by the projected long growth.
Aldis Birkans: We expect earnings assets and net interest income to grow in the second half of 2024, driven by projected long growth. The net interest margin in the second quarter was 3.76 percent, and we experienced the lowest quarterly cost of funds increase since the beginning of this rate cycle. Consistent with these trends, our NIM outlook for the rest of 2024 remains intact for the mid-3-7. During the quarter, we made great progress in bringing down our non-performing loans and NPA ratios to the lowest level since early 2023.
All: Net interest margin in the second quarter was 3.76%, and we experienced the lowest quarterly cost of funds increase since the beginning of this rate cycle.
All: Consistent with these trends, our NIM outlook for the rest of 2024 remains intact for the mid-3 South.
All: During the quarter, we made great progress in bringing down our non-performing loan and NPA ratios to the lowest level since early 2023.
Aldis Birkans: Our remaining OREO balances are at the lowest levels in the company's history, and during the quarter, we have decreased our classified load. Annualized net charge-outs for the quarter were 22 basis points, or just 11 basis points on a year-to-date basis, driven by one previously reserved credit.
All: Our remaining order balances are at the lowest levels in the company's history, and during the quarter we had decreased our classified loans.
All: Annualized net charge-outs for the quarter were 22 basis points or just 11 basis points on a year-to-day basis.
Aldis Birkans: This quarter's provision expense of $2.8 million was primarily driven by loan growth and changes in the CECL model's underlying economic forecast, specifically the unemployment rate outlook. The allowance-to-toll loan ratio ended the quarter at 1.25%, and we continue to hold $25.4 million in marks against our acquired loan portfolio, which equates to 33 basis points of additional loan loss coverage if applied across the whole loan portfolio.
All: driven by one previously reserved credit.
All: As a result, this quarter's provision expense of $2.8 million was primarily driven by loan growth and changes in CECL model's underlying economic forecast, specifically the unemployment rate outlook.
Operator: The allowance to total long ratio and of the quarter at 1.25% and we continue to hold $25.4 million in marks against our acquired long portfolio, which equates to 33 basis points of additional long-lost coverage if applied across the whole long portfolio.
All: The allowance-to-toll loan ratio ended the quarter at 1.25% and we continue to hold $25.4 million in marks against our acquired loan portfolio, which equates to 33 basis points of additional loan loss coverage if applied across the whole loan portfolio.
Aldis Birkans: Total non-interest income for the second quarter was $14 million. The score will be recorded $3.9 million of impairment related to Venture Capital Investments. The driving force behind this valuation adjustment was the continued weakness in venture capital markets, resulting in down-on-capital raises.
Operator: Total non-insistant income for the second quarter was $14 million. The score of a record of $3.9 million of impairment related to venture capital investments. The driving force behind this valuation adjustment was the continued weakness in venture capital markets, resulting in down-around capital raises.
All: Total non-interest income for the second quarter was $14 million.
All: The score will be recorded $3.9 million of impairment related to venture capital investments.
All: The driving force behind this valuation adjustment was the continued weakness in venture capital markets, resulting in down round capital raises.
Aldis Birkans: Adjusted for this one-off impairment, NQ1s gained on the sale of a banking center property. The quarter's non-interest income grew nicely by $900,000, with solid growth from core banking fees, mortgage banking revenues, AMBER fees, and SBA gains on sale. For the second half of 2024, we project our fee income to be in the range of $33 to $35 million. Non-interest expense for the quarter totaled $63.1 million, a $200,000 increase relative to the first quarter.
Operator: Adjusted for this one-off impairment and a few ones gained on sale of a banking center property. The quarter's non-interest income grew nicely by $900,000. With the solid growth from poor banking fees, mortgage banking revenues, hamburger fees, and SBA gains on sale.
All: Adjusted for this one-off impairment, NQ1s gained on sale of a banking center property. The quarter's non-interest income grew nicely by $900,000, with solid growth from core banking fees, mortgage banking revenues, Hamburg fees, and SBA gains on sale.
Operator: For the second half of 2024, we project our fee income to be in the range of $33 to $35 million. Non-insist expense for the quarter total $63.1 million, $2,000 increased relative to the first quarter.
All: For the second half of 2024, we project our fee income to be in the range of $33 to $35 million.
All: Non-interest expense for the quarter totaled $63.1 million, a $200,000 increase relative to the first quarter.
Aldis Birkans: The link order to unified related expenses increased approximately half a million dollars, with the core bank expenses decreasing slightly. Looking ahead for the rest of 2024, we see our second half of 2024 non-interest expense to be in the range of $127 to $130 million. The increase, relatively, to the $126 million expense realized during the first six months of this year is entirely due to a step up into unified related expenses. In terms of capital, we continue to grow our excess capital with a TCE ratio ending the quarter at 9.4%, Tier 1 leverage ratio at 10.2%, and CET1 ratio at 12.4%, which provides us with various strategic alternatives. And Global Book Value Per Share grew another two percentage points, ending the quarter at $23.74.
Operator: The link order to unify related expenses increased approximately half million dollars for the poor bank expenses decreasing slightly.
All: The link order to unified related expenses increased approximately half a million dollars with the core bank expenses decreasing slightly.
Operator: Looking ahead for the rest of 2024, we see our second half 2024 non-insist expense to be in the range of $127 to $130 million. The increased, relatively to the $126 million expense realized during the first six months of this year, is entirely due to a step up into unify related expenses.
All: Looking ahead for the rest of 2024, we see our second half 2024 non-interest expense to be in the range of $127 to $130 million.
All: The increase relatively to the $126 million expense realized during the first six months of this year is entirely due to a step up into unified related expenses.
Operator: In terms of capital, we continue to grow our excess capital with a TCE ratio and in the quarter of 9.4%. Tier 1 leverage ratio: 10.2%. And CET, 1 ratio, 12.4%.
All: In terms of capital, we continue to grow our excess capital with a TCE ratio, ending the quarter at 9.4%, tier one leverage ratio at 10.2%, and CET one ratio at 12.4%, which provides us with various strategic alternatives.
Operator: Which provides us with various strategic alternatives. And we'll look value-per-share through another two percentage points, ending the quarter at $23.74.
All: And Global Value Per Share grew another 2 percentage points, ending the quarter at $23.74.
Aldis Birkans: And with that, I'll turn it back.
Operator: And that's how it turned back to you. Thanks all, this is all just shared.
Tim Laney: Thanks, Aldis. As Aldis just shared, solid earnings resulted in tangible common equity increasing by $0.42 to $23.74 per share.
Speaker Change: And with that, I'll turn it back to you.
Operator: Solid earnings resulted in tangible common equity increasing 42 cents to $23.74 per share.
Speaker Change: Thanks, Aldis. As Aldis just shared, solid earnings resulted in tangible common equity increasing $0.42 to $23.74 per share.
Tim Laney: The strength of our balance sheet provides NBH with broad optionality, including a substantial investment in the build-out of two unifiers. With respect to UNIFI, I'm pleased to report that we are moving into user acceptance testing in a production environment and continue to project that we will enter controlled beta testing with friends and family during the fourth quarter of this year. I'll stop there and ask Maddie to open up the lines for questions. Of course, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off.
Operator: The strength of our balance keep provides in-be-age with broad optionality including the substantial investment in the build out of to unify. With respect to unify, I'm pleased to report that we are moving into user acceptance testing in a production environment and continue to project center controlled beta testing with friends and family during the fourth quarter of this year.
Speaker Change: The strength of our balance sheet provides NBH with broad optionality including the substantial investment in the build-out of 2Unify.
Speaker Change: With respect to UNIFI, I'm pleased to report that we are moving into user acceptance testing in a production environment and continue to project that we will enter controlled beta testing with friends and family during the fourth quarter of this year.
Operator: I'll stop there and ask Matty to open up the lines for questions. For us, 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 off to a light signal key permit. Again, press star.
Speaker Change: I'll stop there and ask Maddie to open up the lines for questions.
Maddie: Of course, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach HR equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Jeffrey Rulis, your line is live.
Maddie: Of course, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off.
Operator: For one to ask a question, what pause for just a moment to allow everyone an opportunity to signal for questions.
Maddie: Off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.
Jeffrey Rulis: Okay, hello. Can you hear me? Very well, thank you.
Jeffrey Allen Rulis: Okay, hello, can you hear me? Very well, thank you, okay, there's a big pause. I couldn't hear anything.
Maddie: Jeff Rulis, your line is live.
Jeffrey Allen Rulis: Okay, hello. Can you hear me?
Operator: Okay, this is a big pause. I couldn't hear anything. Yeah, no, nor could we.
Jeffrey Allen Rulis: Very well, thank you. Okay, okay. That was a big pause, I couldn't hear anything.
Tim Laney: Nor could we. I'm glad you're here, Jeff. What can we do? What questions can we answer for you this morning? Yeah, maybe just poking into the margin a little bit, and well, I guess first, I want to get your comfort level with, kind of, it looks like the cash balances continue to come down. Do you feel like you're at a level that that's sustainable, or could that come down any further? And then, I guess, the second question, maybe for Aldis, is just do you have the June average margin relative to the quarterly average? Thanks.
Operator: I'm glad you're here, Jeff. Okay.
Operator: What can we do? What questions can we answer for you?
Speaker Change: Nor could we. I'm glad you're here, Jeff. What can we do? What questions can we answer for you this morning?
Operator: Yeah, this is poking into the margin a little bit.
Operator: And well, I guess first, I want to get your comfort level of kind of looks like the cash balance is continuing to come down. You feel like you had a level that’s sustainable or could that come down any further?
Maddie: Yeah.
Tim Laney: Right. So, in terms of cash, I think cash is going to be around the levels that you're seeing here where we ended the quarter on a go-forward basis that provides us with plenty of balance sheet liquidity. Now, having said that, I will say that, you know, a lot of... going through the CrowdStrike event. We build up cash going over the weekend just to be safe, but in the long run, we run in cash where we are. In terms of the margin for June, June was right exactly where the quarter is at 376.
Jeffrey Allen Rulis: Maybe just poking into the margin a little bit and, well, I guess first...
Jeffrey Allen Rulis: want to get your comfort level of, and it looks like the cash balances continue to come down. You feel like you're at a level that that's sustainable or could that come down any further? And then I guess second question maybe for all this is just, do you have the June ?
Operator: And then I guess the second question, maybe for all this, is just, do you have the June average margin relative to the quarterly average? Thanks.
Speaker Change: average margin relative to the quarterly average. Thanks.
Operator: Right. So, in terms of the cash, I think cash is going to be around the levels that you're seeing here. Well, we ended the quarter on a go for basis that provides us plenty on balance sheet liquidity.
Speaker Change: Right, so in terms of the cash, I think cash is going to be around the levels that you're seeing here where we ended the quarter on a go-forward basis that provides us with plenty on balance sheet liquidity. Now having said that, I will say that you know last
Operator: Now, having said that, I will say that, you know, last going through the cross strike events. We build up cash going over the weekend just to be safe, but on the long run, be running cash where we are. In terms of the margin for June, June was right exactly what the quarter is at 376.
Speaker Change: going through the CrowdStrike event. We built up cash going over the weekend just to be safe, but on the long run, we're running cash where we are. In terms of the margin for June , June was right exactly where the quarter is at 376.
Operator: Got it. Okay.
Tim Laney: Got it. OK. And so back on that kind of earning asset and NII expectation for growth, that if cash is sort of settled in here, expect those balances to grow in the second half. That's sort of part of the guide. That's correct. Okay. And maybe on the credit side, first, any kind of color of type and maybe what occurred in the non-accrual declines. And then second, the 30 to 89 day bucket was up a bit, and wanting to know if there was anything timing-related to those balances lifting.
Operator: And so back on that kind of earning asset and I expectation for growth that.
Speaker Change: got it okay and so back on that kind of earning asset and NII expectation for growth that if cash is sort of settled in here expect those balances to grow
Operator: If cash is sort of settling here, expect those balances to grow in the second half is sort of part of the guide. That's correct.
Speaker Change: and the second half is sort of part of the guide.
Operator: Okay. And maybe on the credit side.
Speaker Change: That's correct.
Speaker Change: Okay, and maybe on the credit side, first,
Operator: First of any kind of color of type and and maybe one occurred in the the non or cruel declines.
Speaker Change: any kind of color of type and maybe what occurred in the non-accrual declines. And then second, the 30 to 89 day bucket was
Operator: And then second, the 30 to 89 day bucket was up a bit and wanting to know if there was anything timing related with those balances lifting.
Speaker Change: was up a bit and wanting to know if there was anything timing related with those balances lifting.
Tim Laney: Yeah, very good questions. The reduction in non-performers was largely related to one credit that we've previously discussed and where it had been previously reserved, so that was the driver of non-performing loans. With respect to the past dues, more than half of that, I'm embarrassed to say, was administrative in nature. We have a track record of not letting that kind of thing happen, and I don't intend to let it happen again, and more than half of those past dues have already been resolved, so I don't think it's an indication of a negative credit trend. I'm embarrassed to say that in a number of cases, it was just sloppy work on our part.
Operator: Very very good questions. The reduction in non performers was largely related to one credit that we've previously discussed and where it had been previously reserved. So that that was the driver on non performing moms with respect to the past dues more than half of that.
Speaker Change: Yeah, very good questions. The reduction in non-performers was largely related to one credit that we've previously discussed.
Speaker Change: and where it had been previously reserved.
Speaker Change: that was the driver on non-performing loans. With respect to the past dues, more than half of that, I'm embarrassed to say, was administrative in nature. We have
Operator: I'm embarrassed to say it was administrative in nature. We have a track record of not letting that kind of thing happen, and I don't intend to let it happen again. And more than half of those past dues have already been resolved. So I don't think it's an indication of a negative credit, friend. I'm embarrassed to say it, in a number of cases it was just sloppy work on our part.
Speaker Change: track record of not letting that kind of thing happen, and I don't intend to let it happen again. And more than half of those past dues have already been resolved. So I don't think it's an indication of a negative credit trend.
Speaker Change: I'm embarrassed to say in a number of cases it was just sloppy work on our part.
Operator: Got it.
Tim Laney: Got it. So, Tim, back to that. The decline in nonaccrual, it's the same loan that both drove the decline in nonaccrual and the net charge-offs in the quarter. You're exactly right.
Operator: So, Tim, back to that decline in the non-ocro. It's the same loan that both drove the decline in non-Ocro and that charge off in the quarter.
Speaker Change: Got it. So, Tim, back to that. The decline in the nonaccrual, it's the same loan that both drove the decline in nonaccrual and the net charge-offs in the quarter?
Operator: You're exactly right.
Tim Laney: Okay, maybe a last one for you, Tim, while I have you, the absence of M&A. I think last quarter you talked about, you know, the buyback as an option. Clearly, we've seen a nice lift in the stock, and maybe valuation is... Restrictive to a degree. I just check it back in on the use of capital, and you could open the book on either M&A or buyback appetite.
Operator: Maybe a last one pointed him while I have it.
Tim Laney: You're exactly right.
Speaker Change: Okay. Maybe a last one for you, Tim, while I have you. The, you know, the absence of M&A, I think last quarter you talked about.
Operator: The absence of M&A, I think last quarter you talked about the buyback as an option. Clearly, we've seen a nice lift in the stock, and maybe valuation is restrictive to a degree. I just check it back in on use of capital and you could open book on either M&A or buyback of capital.
Speaker Change: and the other side, the buyback as an option. Clearly, we've seen a nice lift in the stock and maybe valuation is...
Speaker Change: restrictive to a degree I just check it back in on use of capital and you could you know open book on on either M&A or buyback appetite.
Operator: Well, you're once again exactly right on buyback. I mean we have a target price, but with what we've seen in the market with our stock price, it's not an area where we would be engaging right now.
Tim Laney: Well, you're you're once again, you're exactly right on the buyback. I mean, we have a target price, but with what we've seen in the market and with our stock price, it's not an area where we would be engaging right now. To your question on M&A, I'll simply say, with the targets that we've previously discussed in terms of the size of the transaction we would be interested in. I am busier in M&A and partner discussions than I've ever been in the history of the company.
Tim Laney: Well you're once again you're exactly right on buyback. I mean we have a target price that with what we've seen in the market and with our stock price it's not not an area where we would be engaging right now. To your question on M&A I'll simply say
Operator: To your question on M&A, I'll simply say, with the targets that we've previously discussed in terms of size of transaction we would be interested in. I am busier in M&A and partner discussions than I've been in the history of the company.
Tim Laney: with the targets that we've previously discussed in terms of size of transaction we would be interested in.
Tim Laney: I am busier in M&A and partner discussions than I've been in the history of the company.
Tim Laney: Okay. And again, those... Broad brush here, but kind of, fee income contributors and or kind of in-market, kind of a summary of those, that ideal candidate, Tim? Yeah.
Operator: Okay, and again those broad brush here, but kind of fiancum contributors and or kind of in market, it's kind of a summary of those that ideal candidate Tim. Yeah, look, you know we've said for some time I'd do the candidate would be a part of our existing market and build out or contingent markets that we found attractive to us. We've always believed that investing in markets that are growing faster than the national average is a key to success. So we're always going to be drawn to those stronger markets here in the US, and again, either already in market or contingent markets.
Speaker Change: Okay and again those broad brush here but kind of
Speaker Change: fee income contributors and or kind of in market it's kind of a summary of those that ideal candidate Tim
Tim Laney: Look, you know, we've said for some time that, ideally, the candidate would be part of our existing market and build out our contingent markets that we find attractive to us. We've always believed that investing in markets that are growing faster than the national average is a key to success. So we're always going to be drawn to those stronger markets here in the U.S. and, again, either already in the market or contingent on markets.
Speaker Change: Yeah.
Tim Laney: Look, you know, we've said for some time, ideally, the candidate would be part of our existing market and build out our contingent markets that we found attractive to us.
Tim Laney: We've always believed that investing in markets that are growing faster than the national average is a key to success.
Tim Laney: So we're always going to be drawn to those stronger markets here in the U.S. and again, either already in market or contingent to markets.
Tim Laney: We think culture is incredibly important, probably not talked about enough in terms of ensuring there's the right fit, the right attitude toward credit risk management, in fact, all risk management, and the right attitude toward the way we work together. We certainly continue to look at it from a return metric on a crossover method, expecting transactions to come in under three years and earn back, and we've certainly seen our last few transactions do much better than three years. So we're holding ourselves to a high standard there. And I don't know, Aldis, anything else you would add? No, thank you so much, Bill.
Operator: We think culture is incredibly important, probably not talked about enough in terms of ensuring there's the right attitude toward credit risk management; in fact, all risk management and the right attitude toward the way we work together. We certainly continue to look at it return metric on across our method, expecting transactions to come in under three years and earn back, and we certainly seen our last few transactions do much better than three years. So we're holding ourselves to a high standard there.
Speaker Change: We think culture is incredibly important, probably not talked about enough in terms of ensuring there's the right fit, the right attitude toward credit risk management, in fact, all risk management.
Tim Laney: Great, thank you. You bet. Thank you.
Speaker Change: and the right attitude toward the way we work together.
Speaker Change: We certainly continue to look at it from a return metric, on a crossover method, expecting transactions to come in.
Speaker Change: under three years and earn back. And we've certainly seen our last few transactions do much better than three years. So we're holding ourselves to a high standard there. And I don't know, Aldis, anything else you would add? No, thank you so much as well.
Operator: And I don't know all this anything else you have. Now, I think you're similar as well.
Operator: Great, thank you.
Tim Laney: You bet. Thank you for your questions.
Operator: You've got to thank you for your Thank you, guys. Thank you, and I am showing we have no further questions at this time.
Aldis Birkans: Great, thank you.
Aldis Birkans: You bet. Thank you for your questions.
Kate Ashley: We'll take our next question from Kate Ashley with KBW.
Speaker Change: We'll take our next question from Kate Ashley with KBW.
Tim Laney: Hi, this is Kate Onn for Kelly Motta. Yes, so... Since loan growth is really strong, I was just wondering how your pipelines are holding up and where you're still seeing good demand from borrowers in any areas you're pulling back from.
Speaker Change: Hi, this is Kate Onn for Kelly Motta.
Speaker Change: Okay, yeah, so
Kate Onn: So since loan growth is really strong, I was just wondering how your pipelines are holding up and where you're still seeing good demand from borrowers in any areas you're pulling back from? Thank you.
Tim Laney: Yeah, thanks for the question. We entered the third quarter with a very strong pipeline, and I think we're all very encouraged by the tone of conversations we're hearing in our marketplaces from our clients. So we're increasingly optimistic as it relates to our activity in the small business and middle market arenas. I'll also say that in a number of our markets, it feels like there is a pent-up demand for mortgage banking activity.
Speaker Change: Thanks for the question.
Speaker Change: [inaudible]
Speaker Change: We entered the third quarter with a very strong pipeline, and I think we're all very encouraged by the tones of conversations we're hearing in our marketplaces from our clients.
Speaker Change: So, we're increasingly optimistic as it relates to our activity in the small business and middle market arenas.
Speaker Change: I'll also say in a number of our markets, it feels like there is a pent-up demand for mortgage banking activity. We believe that rates really have to drop to a point where we're talking about loans with a five-handle. And if that happens, we very well could see a break in the dam, and that could represent some interesting upside that we haven't included in our guidance.
Tim Laney: We believe that rates really have to drop to a point where we're talking about loans with a five-handle. And if that happens, we could very well see a break in the dam, and that could represent some interesting upside that we haven't included in our guidance.
Tim Laney: But the demand there really seems to be high and tied to getting to that five-handle interest rate. With respect to areas we're pulling back from, I would say the most concerning industry, and it represents only about two and a half percent of our loan portfolio, but it would be our exposure to trucking and transportation. I don't think anyone on this line would be surprised to hear that that industry continues to be under incredible pressure, rate pressure, expense pressure, oversupply of vehicles, and collateral values dropping as a result of some major bankruptcies in the space. And by the way, what we're seeing there, it's interesting. It's a classic tale of two cities.
Speaker Change: The demand there really seems to be high and tied to getting to that five-handle interest rate.
Speaker Change: With respect to areas we're pulling back from, I would say the
Speaker Change: The most concerning
Speaker Change: and it represents only about 2.5% of our loan portfolio.
Speaker Change: But it would be our exposure in trucking and transportation. I don't think anyone on this line would be surprised to hear that that industry continues to be under incredible pressure, rate pressure, expense pressure, oversupply of vehicles, collateral values dropping as a result of some major bankruptcies in the space.
Speaker Change: So that, and by the way, what we're seeing here, it's interesting, it's the classic tale of two cities. It would seem that
Tim Laney: It would seem that our stronger clients are getting stronger, and those that weren't as prudent with their capital during the COVID period are experiencing more weakness. So, you know, and what we're talking about are less than a handful of loan-related credits that we're watching closely that we think we may have some work to do. Where we think we may have some work to do. But I can't really point to any other industries where we have concerns.
Speaker Change: are getting stronger, and those that weren't as prudent with their capital during the COVID period
Speaker Change: are experiencing more weakness. And what we're talking about are less than a handful of...
Speaker Change: of loan-related credits that we're watching closely that we think we may have some work to do, where we may, where we think we may have some work to do. But I, you know, I can't really point to any other industries where we have concern.
Kate Ashley: Great, thank you for all the color. I'll step back.
Speaker Change: Great, thank you for all the color. I'll step back.
Maddie: We'll take our next question from...
Speaker Change: We'll take our next question from...
Maddie: I'm sorry, Maddie, we are having a hard time hearing you. The other speakers are coming in loud and clear. Can you speak up or check your line? Yes, I apologize.
Speaker Change: I'm sorry, Maddie, we are having a hard
Maddie: Yes, I apologize. Can you hear me better? We can. Yes, we have Andrew Terrell with Stevens on the line.
Maddie: Can you hear me better?
Speaker Change: We can. Yes, we have Andrew Terrell with Stevens on the line.
Robert Andrew Terrell: Good morning, Andrew. Hey, Tim, maybe just to start, you talked about just briefly in the prepared remarks that they kind of increased the capabilities of Canberra investing to that extent, any, any additional color you can provide on the kind of the investments you're making there, and then what type of future benefits you might expect. Yeah, I'll ask Aldis to share more detail. But at a very high level, we are building out our expanding network capabilities that will ultimately result in increases in revenue or distribution income to NBH. And with that, and again, I know all of us were sensitive to talking about some of
Robert Andrew Terrell: Hey, good morning.
Andrew: Good morning, Andrew.
Andrew: Hey, um...
Speaker Change: Tim, maybe just to start.
Robert Andrew Terrell: You talked about, just briefly in the prepared remarks, mentioned that they're kind of increasing the capabilities of Canberra, investing to that extent. Any incremental color you can provide on kind of the investments you're making there, and what type of future benefits you might expect?
Robert Andrew Terrell: Yeah, I'll ask Aldis to share more detail, but at a very high level...
Aldis Birkans: We are building out, or expanding network capabilities that will ultimately result in increases in B-income or spread income.
Speaker Change: to NBH, and with that, and again, I know all of us were sensitive to talking about some of the...
Tim Laney: Pricing elements are there, but you may want to expand. Yeah. Andrew, hi. In addition to building out kind of network capabilities and direct distribution capabilities instead of putting in some sort of a network, we're also working on some expansion of product capabilities, such as, you know, something that comes to mind that has become quite widely used since SVB's collapse was a reciprocal FDIC insurer deposit capability, and that's something we're exploring as well. But more immediately, the investment has been around network expansion and network optionality, and we do expect to see fee income increases related to that.
Speaker Change: [inaudible]
Aldis Birkans: in addition to building out kind of network capabilities and direct distribution capabilities instead of putting in some sort of a network.
Speaker Change: We're also working on some expansion of product capabilities, such as something that comes to mind that became quite widely used since SVB's collapse was reciprocal.
Speaker Change: FDIC insurer deposit capabilities, and that's something we'll be exploring as well.
Speaker Change: just to give you an example. But more immediately, the investment has been around network expansion, network optionality, and we do expect to see fee income increases related to that.
Aldis Birkans: I would assume that's not contemplated in your back half, the income guidance, then also, if I could just sneak it in on the fee guide, it looks like the second half guidance implies maybe a stable or slight moderation of the fee income run rate from here, mainly softer mortgage banking in the back half of the year, or what's driving the fee income guide?
Speaker Change: understood okay I would assume that's not contemplated in your back half the income guidance then also if I could just sneak it in on the fee guide it looks like
Speaker Change: The second half guidance implies maybe stable or slight moderation in the fee income run rate from here. Is that mainly software mortgage banking in the back half of the year, or what's driving the fee income guide?
Aldis Birkans: Yeah, Tim kind of touched on the mortgage where we feel like a pivot point is in terms of that market all of a sudden opening up. We are being careful in guiding in terms of the second half, you got it, it's the mortgage, the income is pulling that a little bit back in terms of what we realized in at least the second quarter.
Speaker Change: Yeah, so Tim kind of touched on the mortgage where we feel like the pivot point is in terms of that market all of a sudden opening up. We are being careful in guiding in terms of second half, you got it, it's the mortgage, the income is pulling that a little bit back in terms of what we realized in at least say second quarter.
Aldis Birkans: In terms of Canberra, back to that first part of that question, no, it's not embedded yet in the guidance. I do expect that to really start coming through in 2025, but it's near-term. It's not a 2025 opportunity.
Speaker Change: In terms of Canberra, back to that first part of that question, no, it's not embedded yet in the guidance. I do expect that to really start coming through in 2025, but it's near-term. It's not a 2025 opportunity.
Tim Laney: Yep, okay, very good, and then on just more broadly to the point of the dam breaking, if you will, on mortgage banking or just any kind of pickup in activity should mortgage rates come down more significantly. Can you help me think about just... I don't know if framing the upside is the right question to ask, but any changes you've made in terms of staffing or how the mortgage division is structured while rates have gone up and mortgage production obviously comes in, just as we think about mortgage production increasing for the industry over time, any change to your participation in that?
Speaker Change: Yep okay very good and then on on just more more broadly to the point on the
Speaker Change: the dam breaking, if you will, on mortgage banking or just any kind of pickup in activity should mortgage rates come down more significantly. Can you help me think about just...
Speaker Change: I don't know if framing the upside is the right question to ask, but any changes you've made in terms of staffing or how the mortgage division is structured?
Speaker Change: While rates have gone up and mortgage productions obviously come in just as we think about like Mortgage production increasing for the industry over time any change to your kind of participation in that
Tim Laney: Yeah, it's an important question. I would tell you I'm incredibly proud of our residential mortgage leadership. They've demonstrated the ability to flex up and down on personnel as markets grow active or as markets decline, and so we have a track record now of being able to make those adjustments and are certainly always prepared in a scenario like we're in now to increase talent and increase focus on that area should we see the market start to come back to us.
Speaker Change: Yeah, it's an important question. I would tell you I'm incredibly proud of our residential mortgage leadership. They've demonstrated the ability to flex up and down on personnel.
Speaker Change: as markets grow active or as markets decline. And so we have a track record now of being able to make those adjustments.
Speaker Change: and are certainly always prepared in a scenario like we're in now to...
Speaker Change: increased talent and increased focus on that area should we see the market start to come back to us. With respect to
Tim Laney: With respect to underwriting credit metrics, no changes at all. You know, we continue to operate with an average FICO of right around 768, an average loan to value of 73%, and the average of our first mortgage loans is right around $470,000. So again, a granular portfolio of high quality, and we're making no changes to our underwriting standards. In fact, in the last two years, we've tightened them somewhat. So what we're really speaking about is just, again, what we're hearing from our bankers in the market and this belief that, psychologically, if we hit something with a five handle, there could be some upside, and to the point that's already been made, that is not currently contemplated in our projections.
Speaker Change: underwriting credit metrics. No changes at all. You know, we continue to operate with an average FICO of right around 768.
Robert Andrew Terrell: Yeah, got it. Okay. I appreciate it. And if I could just sneak one more in.
Speaker Change: average loan-to-value of 73% and the average of our first mortgage loans is right around $470,000. So again, granular portfolio of high-quality
Speaker Change: and we're making no changes to our underwriting standards. If anything, in the last two years, we've tightened them somewhat. So...
Speaker Change: What we're really speaking to is just, again, what we're hearing from our bankers in the market and this belief that...
Speaker Change: Psychologically, if we hit something with a five handle, there could be some upside. And to the point that's already been made, that is not currently contemplated in our projections.
Speaker Change: Yep, got it. Okay, I appreciate it. And if I could just sneak one more in, Aldis on the on the back half of the year margin guidance.
Aldis Birkans: All this on the back half of the year's margin guidance. Is that inclusive or exclusive of any rate cuts that might be in the forward curve? And then, just more broadly, with the kind of position of the balance sheet today, would you expect really much of a fluctuation if rates do start to come down?
Speaker Change: Is that inclusive or exclusive of any rate cuts that might be in the forward curve? And then, just more broadly, with the kind of position of the balance sheet today, would you expect really much of a fluctuation if rates do start to come down?
Aldis Birkans: As I said in my opening remarks, it does not contemplate any Fed rate changes. Having said that, we do model our balance sheet to be fairly neutral to right-wing movements. But at the end of the day, like most banks, we would welcome an upward-sloping yield curve, and that would be margin-accretive over time. So while it's too early to start projecting 2025, we'll provide that guidance later, but an upward-sloping yield curve would certainly be beneficial to our margin.
Speaker Change: As I said in the opening remarks, it does not contemplate any Fed rate changes. Having said that, we do model our balance sheet to be fairly neutral to rate movements.
Speaker Change: But I will, you know, at the end of the day, like most banks, we would welcome an upward sloping yield curve and that would be margin accretive over time. So while too early to start projecting 2025, we'll provide that guidance later.
Speaker Change: but the upward-solving yield curve would be certainly beneficial to our margin.
Robert Andrew Terrell: Yeah, understood.
Robert Andrew Terrell: Yep, understood. Sorry for missing out on the prepared remarks, but thank you guys for taking the questions.
Speaker Change: Understood. Sorry for missing out on the prepared remarks, but thank you guys for taking the questions.
Speaker Change: Yeah, thank you.
Andrew Brian Liesch: We will take our next question from Andrew Liesch with Piper Sandler. Good morning.
Speaker Change: We will take our next question from Andrew Liesch with Piper Sandler.
Andrew Brian Liesch: Good morning. Good morning.
Andrew Brian Liesch: Sorry to stick with the mortgage question for a bit, even though it's probably a ways out still. But will this be for portfolio growth or for green on sale? Both. Both sides of the statement, yeah. Gotcha. And then, you know, Aldis, just correct me, just a point of clarification here: it sounded like your lines of credit, maybe the utilization rate increased. Did I hear you correctly? And if I did, I mean, how is that going so far?
Andrew Brian Liesch: Good morning. Sorry to stick with the mortgage question for a bit, you know probably a ways out still, but will this be for portfolio growth or for gain on sale?
Andrew Brian Liesch: Boom.
Speaker Change: Got it. Both sides.
Speaker Change: Gotcha. And then, you know, Aldis, just correct me just upon a clarification here, it sounded like your lines of credit, maybe the utilization rate increased? Did I hear you correctly? And if I did, I mean, how is that turning so far this quarter?
Aldis Birkans: It did increase slightly, but stabilized.
Aldis Birkans: It did increase slightly. Stabilized. We had, I think, four consecutive quarters of that coming down.
Aldis Birkans: We had, I think, four consecutive quarters of that coming down. And the second quarter was the first quarter of what I call a small stabilization increase, a percentage point increase. I'd say we still are about eight to nine percentage points below where we typically, on average, our line utilization is. So there's still, I'd say, quite a ways of going in terms of our clients drawing down and utilizing their lines of credit. And so far in July, it hasn't gone one way or another, so I don't see any reason to try and see the direction from what I just talked about. Got it.
Aldis Birkans: And the second quarter was the first quarter of what I call the stabilization small increase, the percentage point increase.
Speaker Change: I'd say we still are about 8 to 9 percentage points below where we typically, on average, our line utilization is. So there's still, I'd say, quite a ways of going in terms of our clients drawing down and utilizing their lines of credit.
Speaker Change: And so far in July , it hasn't gone one way or another, so I don't see any transceded direction from what I just talked about.
Andrew Brian Liesch: Got it. Very helpful. All my other questions have been asked and answered. Thanks so much.
Speaker Change: Got it. Very helpful. All my other questions have been asked and answered. Thanks so much.
Jeffrey Allen Rulis: We will take our next question from Jeff Rulis with D.A. Davidson.
Speaker Change: Thank you.
Speaker Change: We will take our next question from Jeff Rulis with D.A. Davidson.
Jeffrey Allen Rulis: Hi, thanks. Just one quick one. Good morning. Any visibility on the kind of the VC impairments that, from our perspective, how do we try to get a sense for this other than maybe understanding that segments may be challenged? Any forward-looking thing to monitor to kind of keep an eye on these, or are they just going to be lumpy in nature?
Jeffrey Allen Rulis: Hi, thanks. I just have one quick one. Good morning.
Jeffrey Allen Rulis: This may be a tough one to answer, but any visibility on the kind of the VC impairments that from our perspective, how do we try to get a sense for this other than maybe understanding that segments?
Speaker Change: maybe challenged any forward-looking thing to monitor to kind of keep an eye on these or they're just going to be lumpy in nature.
Tim Laney: Yeah, I think you're probably right, you know, and lumpy in terms of upside as well as downside, this was the downside. But you know, we certainly have a mixed portfolio there. As you know, there are many banks that are exposed to fintech funds for one reason or another. And I would suspect more downward pressure until we start to see valuations and capital raises starting to make the turn. I don't know, Aldis; is there anything else you would add to it?
Speaker Change: You know, I think you're probably right, you know, and lumpy in terms of upside as well as down, this was downside, but you know, we certainly
Speaker Change: have a mixed portfolio there. As you know, there are many banks that are exposed to fintech funds for one reason or another, and
Speaker Change: I would suspect more downward pressure until
Speaker Change: We start to see valuations and capital raises starting to make the turn.
Tim Laney: Again, from what we're seeing at a granular level, you know, it'll be a mixed bag. I mean, when we see companies sell, there's upside. If they're still building and are in a capital raise, there's downside. But if we look at it over the life of the portfolio, we still feel very good about it. In the interim, I think, as you describe it, it's a bit lumpy.
Speaker Change: I don't know, Aldis, is there anything else you would add to it? Again, I think...
Aldis Birkans: From what we're seeing at a granular level, you know, it'll be a mixed bag. I mean, when we see companies sell, there's upside. If they're still building and in a capital raise, there's downside. So, if we look at it over the life of the portfolio, we still feel very good about it. In the interim, I think, as you described it, it's a bit lumpy.
Aldis Birkans: Aldis? Yeah, I changed it to the last part of it. Exactly like it was...
Aldis Birkans: It depends on where the lifecycle of the company is, and certainly, we did see a few that needed raised capital here in the second quarter that triggered our valuation adjustments. We look forward and feel good about the valuations in our portfolio, as we said today, but then again, when the next round comes, that will dictate whether it's up or down, and I do agree with Tim. We feel good about our portfolio in general.
Aldis Birkans: Aldis? Yeah, I changed it to the last part of it. Exactly, it were...
Aldis Birkans: It depends on where the lifecycle of the company is, and certainly we did see a few that needed raised capital here in the second quarter that triggered our valuation adjustments.
Aldis Birkans: We look forward and feel good about valuations in our portfolio as we said today, but then again when the next round comes, that will dictate whether it's up or down, and I do agree with Tim. We feel good about our portfolio in general.
Speaker Change: Thanks, guys.
Tim Laney: Thank you, and I am showing that we have no further questions at this time. I will now turn the call back to Mr. Laney for his closing remarks.
Operator: I will now turn the call back to Mr. Laney for his closing remarks. As always, thank you for joining us today. If you have any additional questions, do not hesitate to reach out to us.
Speaker Change: 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.
Tim Laney: As always, thank you for joining us today. If you have any additional questions, do not hesitate to reach out to us. We hope you have a good day.
Mr. Laney: As always, thank you for joining us today. If you have any additional questions, do not hesitate to reach out to us. We hope you have a good day.
Operator: We hope you have a good day.
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.
Maddie: 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.
Speaker Change: 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.
Operator: Thank you very much, and have a great day.
Operator: You may now disconnect. Thank you.