National Bank Holdings Corp
NYSE:NBHC
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National Bank Holdings Corp
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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. [Operator Instructions]. 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, 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 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.
Thank you, Anna. Good morning, and welcome to National Bank Holdings' Second Quarter 2023 Earnings Call. I'm joined by Aldis Birkans, 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 1 ratio of 11.08% an 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 Aldis. Aldis?
All right. Well, thank you, Tim, and good morning. Thank you for joining our earnings call this quarter. For the second quarter 2023, we reported net earnings of $32.6 million or $0.85 per diluted share. The closing and integration of the Cambr acquisition has gone extremely well, and it has -- it already is contributing nicely to our financial results. The 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%, driven by strong organic balance sheet growth, well executed acquisitions, and as 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 3.8% annualized. And on a year-to-date basis, our loan growth has been 5.4% 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 FHLB debt and bring our loan-to-deposit ratio down to 91%.
During our first -- first quarter's earnings call, we mentioned that market conditions were demanding more aggressive deposit pricing, and that is reflected in this quarter's 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 quarter came in at $91.2 million, down $5.1 million from the prior quarter, driven by higher cost of deposits. The second quarter's new loan originations of $362 million came in at an average weighted yield of 8.2%, which resulted in our loan book yield increasing 24 basis points to 6.15%. The resulting net interest margin was 4.07%, and we project NIM to dip slightly below 4% for the second half of 2023.
In terms of our asset quality, it remains strong with just 2 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 CECL 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 a result of our quarterly equity investment assessment 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 bank card income increased $797,000 on a linked quarter basis and $1 million over the same quarter last year. Other banking income increased $2.5 million on a linked quarter basis, mainly driven by Cambr fees and pickup in our mortgage banking income.
Looking ahead for the second half of 2023, we project noninterest income to be in the range of $34 million 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 onetime $2.5 million payroll tax credit benefits. Expenses continue to be well controlled, and for the second half of 2023, we are projecting noninterest expense to be in the range of $123 million to $125 million.
Finally, our capital ratios remained strong at 11.08% common equity Tier 1 ratio and 9.15% Tier 1 leverage ratio. And we maintained sufficient excess capital to provide for various strategic options. Tim, with that, I'll turn it back to you.
Thank you, Aldis. We remain focused on earning the full relationship of our clients. A focus on deposit growth and treasury management is not new to us. It's in fact, a core strength. We operate with zero broker deposits and a high level of noninterest-bearing deposits.
With regard to credit, 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 NBH. And on that note, Anna, we are ready to open up the line for questions.
[Operator Instructions]. And we'll now take our first question from Jeff Rulis with D.A. Davidson.
This is Brett Thompson on for Jeff. I was wondering if you could provide a bit more color...
Good morning.
I was wondering if you could provide a bit more color on the $24 million increase in NPAs this quarter. Kind of what loan segment or segments is that increase coming from? Is it from several borrowers or 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 on nonaccrual that may be impacted?
Yes, sure. Very good question. Look, the nonaccrual increase was driven really by 1 asset-based lending-based relationship. And we believe we've already adequately reserved for any potential loss exposure there. So look, it's been well managed. It was asset-based. We feel comfortable with our advance rates. But as we've historically done, we're going to be aggressive on dealing with any emerging problems.
Yes. And Brett, I would add that when we look at on total criticized loans, bulk actually came down this quarter. So this loan had been accounted in that rate for a period of time already.
So again, already adequately reserved for -- and I expect it to be resolved, if not third quarter, by the end of the year.
Great. And then if I could just ask one more. You guys touched on it a bit more in the remarks, but just to revisit it. The increase in deposits, were those largely from the Cambr acquisition? And if so, should we assume that those deposit transfers are largely done? And then lastly, just as an 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, and behavior -- certainly, deposit -- deposits have been intense over the last several months. But to answer the first part of the question, yes, a good chunk is Cambr-related. We will not provide more detailed guidance just to give ourselves flexibility in how we manage the balance sheet. For that matter, the sort of the Cambr fees, we will not provide more guidance on a forward basis, either just to give ourselves ability to manage the balance sheet and flow that program without jeopardizing our competitive advantage.
Yes. And I would add, one, we're not going to provide specific guidance. Obviously, we've got the flexibility to hold larger levels of non-brokered deposits from Cambr, 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.
We'll now take our next question from Kelly Motta with KBW.
Kelly, your voice has changed.
Sorry. This is Matt on for Kelly. I wonder if we could just hit on noninterest-bearing deposits for a second. Want to see if you guys are following trends, with -- if -- the pace of those running off is slowing down or what we think they might stabilize that? Or any kind of color you can give us on those noninterest-bearing deposits.
Yes. What we really -- timing-wise, what we saw, the biggest remix shift took place in late March, early April, or call it, month or early part of the second quarter. That has stabilized then. As we sit today, for example, our noninterest-bearing deposits are flat through month of July. So we feel like at least the trends have normalized.
All right. 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 similar comments on that, where the biggest repricing of the book did take place in late March and month of April. I'll say that we are entering here, month of July or third quarter with a margin right around 4%. So still holding into the 4%. No monthly margin for last quarter was below 4%. So again, while on a linked quarter basis, it may appear significant decrease, we forecasted that and signaled that and feel pretty good about where margin is stabilizing.
We'll now take our next question from Andrew Terrell with Stephens.
Appreciate the color there on the margin. Maybe just on the deposit cost specifically, do you have -- similarly, the monthly or the spot interest-bearing deposit costs at the end of the second quarter? And then just overall on kind of beta commentary. I think in the past, we had talked about a maybe 30%, 35%-type range for deposit beta. Does that still feel like it's an achievable kind of beta target through the cycle? Or are you seeing more pressure than you would have anticipated?
Well, certainly, I think we all in the industry are seeing more pressure than we anticipated or historically would have thought. Now like I mentioned in my prepared remarks, we are setting a 22% beta through cycle, which I would consider being extremely good. Still, where it ends up is at this point, I don't think I'm going to try to project that. But in terms of the deposit costs and where we are entering the third quarter, deposit cost is roughly around 1.45 versus 1.27 that were for second quarter total. So it is certainly higher. But as I mentioned, again, the margin, the other side of the earning assets are more than offsetting -- or not more benefiting, but offsetting that, and we are entering with a 4% margin here in the third quarter.
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 like that back up or other issues in the marketplace like that back up? Possibly. 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 fancy ourselves as having a lot of discipline there. We really believe in the strength of our core deposits. But quite frankly, as we move through the second quarter, we just saw bank and nonbank competitive pricing force 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, if deposit costs are around that 1.45 territory coming into the third quarter, that it does feel like the pricing pressure has slowed a little bit. Maybe, Tim, I know you mentioned maybe a little bit last quarter, but with Cambr now kind of completely in the fold and integration done, you guys have hit the ground running. Can you just talk about how you see this fitting within the overall 2UniFi build-out? And then maybe an overall status update on progress you've made in the second quarter to start the year on 2UniFi, just the overall build-out and how that plays in the bank?
No. Thank you for asking. We have weekly deep assessments of our projects all related to 2UniFi, 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'll be in friends and family testing in 2024. And just given what we've seen, even here in the first 6 months of this year in terms of bank client behavior, we think 2UniFi is going to be incredibly important in the future of banking. So I really want to applaud our team that's leading and working 2UniFi because they're driving toward the kind of projected deliverables and the time frames 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.
And then I think we've also discussed 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 that something we could also see if 2UniFi is moving to friends and family in '24, could we see potential for increase or improved efficiency at the core bank as a result of that as well?
Yes. 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. And we're working with a 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 in it to shift our core bank to that platform could be a game changer. So I don't see that happening in '24 because we're going to live with what we've built for a while before we make such a big bet.
Understood. If I could ask just one more modeling question. Aldis, on the -- the release called out the Cambr-related acquisition expenses, I think $500,000 of transaction and $600,000 of intangible amortization. Is the $500,000 was called out a recurring item? Or is that a more kind of onetime transitory expense?
No, that's onetime transitory expense. And obviously, the $600,000 intangible amortization, that is unfortunately with us, but given how the accounting works. But the $500,000 is onetime.
We'll now take our next question from Andrew Liesch with Piper Sandler.
A question on the Cambr revenue, that $1.2 million that came on. When you guys closed the deal at the beginning of April, was that in line with your expectations? Or was that a little high or a little low or just right?
Well, 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're expecting.
Is it fair to add on to say -- I know 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 Cambr.
Yes, what Tim is 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 and hitting our financials the way we expected, and that is hitting the way we're expecting it. But we do believe there's ability to continue to expand the capabilities and our revenues.
Got it. So it's safe to assume that maybe this $1.2 million number is already captured in the guidance at least for the back half of this year?
That is -- 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. More 2UniFi investments? What's the -- what's starting that uptick?
Yes. No, I think you hit it on the head, 2UniFi continued investment and expansion, 2UniFi is -- it is what's driving that little bit of increase in our expense guidance. As I mentioned, once you back out and normalize that $2.5 million retention credit to be realized in the first quarter. Auto expenses were more or less flat on a linked quarter basis. That is -- I'd say that is our current run rate, even though there's quite a bit of a nuance between processing fees being better in these onetime Cambr-type related items. But we do continue to expect to continue to increase our investment in 2UniFi and that is in the guidance for second half.
Got you. And then can you just remind us, how is the balance sheet position right now for any additional changes in rates that the Fed might undertake?
Yes. We've -- as time has progressed, we've been closing down our asset sensitivity. So while we will benefit slightly here, if the Fed moves next week, not materially anymore because, then again, as we are nearing the top of the range of at least what the futures start indicating of the Fed rate cycle, we certainly want to be able to protect our margin on the rates way down-type of environment as well. So most of the asset sensitivity has played out as far as how we model.
We'll now take a question from Brett Rabatin with Hovde Group.
Wanted to start with any additional color that you could provide on the venture capital write-downs, if 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 and frankly, contribute to the build-out 2UniFi. I think most know that tech valuations are very challenging in the current market. And then the absence of fresh capital raises, it's pretty difficult to nail down those valuations. Candidly, I'll probably get in trouble for saying this, but it feels like at this point in the cycle, it's 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're not going to address, obviously, any specific names in that portfolio. But Aldis you may want to just talk broadly to our total exposure there. And that might help answer Brett's question.
Yes. In terms of our total exposure to whether the direct equity-type investment or venture fund that many other banks may be part of, we have approximately $50 million, a little shy of $50 million in terms of investments and exposure.
Okay. That's helpful. And then wanted to talk about like the balance sheet and the funding going forward. Obviously, you used Cambr and were a little more aggressive with deposits to lower the FHLB 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 funding sources from here and how you manage that?
Yes. No. Absolutely. Right? I mean that is -- if you look at the items in our balance sheet that by far, is the most expensive cost of funding and in terms of maximizing our net income, it is goal to pay down as much federal home loan bank advances as possible. We do like that capacity in terms of liquidity and access. So having a small amount on balance sheet and always have that machines -- grease those wheels to make sure that we have access, and certainly, again, over the last 4 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 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 quite clear on the fee income guidance of $34 million to $36 million. Does that include or not include any potential improvement in the Cambr revenue going forward?
That's our rest of the year outlook for inclusive of all our lines of business. So including Cambr, mortgage banking -- core banking fees.
But I think his question was, does it include any of the optimization of Cambr? And the answer is no. We've just taken our expected run rate. Based on what we saw coming in the first -- the second quarter.
Okay. And if I could sneak in one last one. Tim, I'm curious, I've had a few banks tell me that they're starting to have a few conversations. I'm curious if you've had any that reach out to you or if you were in any early rumblings of maybe some deal activity at some point in the next few quarters?
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 mode. 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 I think it will set us up nicely for 2024 with a lot of optionality.
Okay. That's great color. Appreciate it.
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 fill great about the markets that we operate in. Cost of deposits appears to be stabilizing, and knock on wood, we won't see any more kind of dramatic action in the marketplace. 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.
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.