National Bank Holdings Corp
NYSE:NBHC
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National Bank Holdings Corp
Earnings Call Analysis
Q2-2024 Analysis
National Bank Holdings Corp
National Bank Holdings Corporation had a robust second quarter, reporting net income of $26.1 million, equivalent to $0.68 per diluted share. This performance was fueled by a 3.76% net interest margin and an impressive 8.1% annualized growth in loans. The bank's diversified fee revenue sources also contributed positively, with significant increases seen in various revenue streams.
The bank experienced strong loan fundings totaling $505 million in the quarter, establishing a foundation for future growth. The company anticipates continuing its momentum into the second half of the year, projecting full-year loan growth in the mid-single digits. Furthermore, the bank's credit quality improved significantly, as evidenced by a reduction in nonperforming loans to their lowest level since early 2023. This is indicative of a well-managed, diversified portfolio.
Average deposits grew 7.9% annualized, with transactional deposits making up 87.8% of total deposits. This strong deposit base supported the bank's liquidity and overall financial health. Expenses were carefully managed, increasing only slightly amid strategic investments in technology and fraud defense systems, particularly regarding the development of the 2UniFi platform.
Looking ahead, management provided guidance for continued revenue growth, expecting noninterest income to range between $33 million and $35 million in the second half of 2024. Noninterest expenses are projected to reach between $127 million and $130 million, primarily due to investments in 2UniFi-related expenses. This positions the bank well for future profitability despite rising costs.
The bank is currently focused on expanding its technological capabilities, specifically through enhancements to its Cambr platform, expected to generate increased fee income in the long term. The ongoing expansion and upcoming beta testing of the 2UniFi platform are set to further bolster operational efficiency and customer engagement.
While the overall portfolio remains strong, management expressed concern about specific sectors, particularly trucking and transportation, which represent about 2.5% of the loan portfolio. This sector is facing significant pressures that could impact future loan performance. Management is keeping a vigilant watch on these credits while also noting that much of their client base remains strong.
The bank reported solid capital ratios, with a tangible common equity ratio of 9.4%, providing ample room for strategic options. The tangible book value per share has grown by 2%, reaching $23.74, suggesting strength in the bank's asset base. However, management noted that current stock valuation limits appetite for buybacks and indicated ongoing discussions regarding potential mergers and acquisitions.
The strong performance in the second quarter, combined with a robust pipeline and favorable market conditions, leaves management optimistic about future growth. They highlighted a 'pent-up demand' in mortgage banking that could unleash significant opportunities should interest rates fall to more favorable levels. Overall, the bank appears well-positioned to navigate the evolving financial landscape.
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Good morning, everyone, and welcome to the National Bank Holdings Corporation 2024 Second Quarter Earnings Call. My name is Matti and I will be your conference operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.
I will now turn the call over to Emily Gooden, Director of Investor Relations.
Thank you, Matti, 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, 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.
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 $0.68 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 -- 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. Expenses were well managed, particularly in light of the investments we're making to build 2UniFi, increases in our defenses against emerging fraud threats, and also expanding the capabilities of Cambr. 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. 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 of earnings per diluted share. This quarter was highlighted by strong loan growth and significant progress in reducing outstanding NPLs and NPAs. In terms of the loan growth, loan fundings totaled a strong $505 million, which resulted in an annualized portfolio growth of 8.1%.
The second quarter loan production, combined with the robust loan pipelines, puts us on a trajectory to meet the full year loan growth guidance of mid-single digits. 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 smaller recovery in drawdown of our annualized lines of credit.
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 loan growth. 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. Consistent with these trends, our NIM outlook for the rest of 2024 remains intact for the mid-3 sets.
During the quarter, we made great progress in bringing down our nonperforming loan and NPA ratio to the lowest level
since early 2023. Our remaining order balances are at the lowest levels in the company's history and during the quarter, either decreased our classified loans. Annualized net charge-offs for the quarter were 22 basis points or just 11 basis points on a year-to-date basis, driven by one previously reserved credit.
As a result, this quarter's provision expense of $2.8 million was primarily driven by loan growth and changes in CECL models underlying economic forecast, specifically the unemployment rate outlook. The allowance to total loan ratio ended the quarter at 1.25%, and we continue to hold $25.4 million in March against our acquired loan portfolio, which equates to 33 basis points of additional loan loss coverage, if applied across the whole loan portfolio.
Total noninterest income for the second quarter was $14 million. This quarter, we 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 ground capital raises. Adjusted for this one-off impairment and Q1's gain on sale of a banking center property, the quarter's noninterest income grew nicely by $900,000 with solid growth from core banking fees, mortgage banking revenues, Cambr fees and SBA gains on sale.
For the second half of 2024, we project our fee income to be in the range of $33 million to $35 million. Noninterest expense for the quarter totaled $63.1 million, a $200,000 increase relative to the first quarter. The linked quarter 2UniFi related expenses increased approximately $0.5 million, for the core bank expenses decreasing slightly.
Looking ahead for the rest of 2024, we see our second half 2024 noninterest expense to be in the range of $127 million to $130 million. The increase relatively to the $126 million expense realized during the first 6 months of this year is entirely due to a step-up in 2UniFi 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 of 10.2% and CET1 ratio of 12.4%, which provides us with various strategic alternatives. Tangible book value per share grew another 2 percentage points, ending the quarter at at $23.74.
And with that, I'll turn it back to you.
Thanks for all this. As Aldis just shared, solid earnings resulted in tangible common equity increasing $0.42 to $23.74 per share. The strength of our balance sheet provides NBH with broad optionality, including the substantial investment in the build-out of 2UniFi. With respect to 2UniFi, 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 Matti to open up the lines for questions.
[Operator Instructions] Jeff Rulis, you're line is live.
Can you hear me?
Very well. Thank you.
Okay. It's a big pause. I couldn't hear anything.
Nor could we. I'm glad you hear, Jeff. What can we do? Any questions can we answer?
Yes. Maybe just poking into the margin a little bit. And well, I guess, first, I want to get your comfort level of kind of -- it looks like the cash balances continue to come down. It feels like you're at a level 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 average margin relative to the quarterly average?
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 plenty on balance sheet liquidity. Now having said that, I will say that last going through the CrowdStrike event, 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 where the quarter is at 3.76%.
Got it. Okay. And so back on that kind of earning asset and NII expectation for growth that if cash is sort of settle in here, expect those balances to grow in the second half is 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 nonaccrual declines? And then second, the 30 to 89-day bucket was was up a bit. And wanting to know if there was anything timing related with those balances lifting?
Yes. Very good questions. The reduction in nonperformers was largely related to one credit that we've previously discussed and where it had been previously reserved. So that was the driver on nonperforming loans.
With respect to the past dues. More than half of that, I'm embarrassed to say, it was administrative in nature. We have 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 in a number of cases, it was just sloppy work on our part.
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?
You're exactly right.
Okay. Maybe a last one for you, Tim, while I have you, 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 restricted to a degree. I just check it back in on use of capital and open book on either M&A or buyback appetite?
Well, you're -- once again, you're exactly right on buyback. I mean we have a target price 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 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.
Okay. And again, those broad brush here, but kind of fee income contributors and/or kind of in market, it's kind of a summary of those -- that ideal candidate, Tim?
Yes. Look, 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. 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 market or contingent to markets, 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 from a return metric on a crossover method, expecting transactions to come in under 3 years and earn back, and we've certainly seen our last few transactions to do much better than 3 years. So we're holding ourselves to a high standard there.
And I don't know, Aldis, anything else you would add?
No, I think you summarized well.
We'll take our next question from Kate Ashley with KBW.
This is Kate on for Kelly Motta. Yes. So system loan growth was really strong. I was just wondering how your pipelines are holding up and where you're still seeing good demand from borrowers? And any areas you're pulling back from?
Yes. 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 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 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 5 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. But the demand there really seems to be high and tied to getting to that 5 handle interest rate.
With respect to areas we're pulling back from, I would say the most concerning industry, and it represents only about 2.5% of our loan portfolio 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.
So that -- and by the way, what we're seeing here, it's interesting, it's the classic tale of 2 cities. 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 -- 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 make -- where we think we have some work to do. But I can't really point to any other industries where we have concern.
[indiscernible]
I'm sorry, Matti, we are having a hard time hearing you, other speakers are coming in loud and clear. Can you speak up or check your line?
Yes. I apologize. Can you hear me better?
We can.
We have Andrew Terrell with Stephens on the line.
Tim, maybe just to start, you talked about just briefly in the prepared remarks, mentioned that the kind of increasing the capabilities of Cambr investing to that extent. Any incremental color you can provide on kind of the investments you're making there and then what type of future benefits you might expect.
Yes. 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 fee income or spread income to NBH. And with that -- and again, I know all this, we're sensitive to talking about some of the pricing elements there, but you may want to expand.
Yes. Andrew, in addition to building out kind of network capabilities and direct distribution capabilities out of -- instead of putting in some sort of a network, we are also working on some expansion of product capabilities such as something that comes to mind that became quite widely used in -- since SVB's collapse was reciprocal, the FDIC insured deposit capabilities, and that's something we're exploring as well. 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.
Understood. Okay. I would assume that's not contemplated in your back half fee income guidance, then also if I could just sneak it in on the fee guide. It looks like the second half guidance implies maybe stable or slight moderation in the fee income run rate from here? Is that mainly softer mortgage banking in the back half of the year? Or what's driving the fee income guidance?
Yes. 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 fee income is pulling that a little bit back in terms of what we realized in second quarter.
In terms of Cambr back to that first part of that question, no, it's not embedded yet in the guidance. I do expect that to really kind of start coming through in 2025 but it's near term, it's a 2025 opportunity.
Yes. Okay. Very good. And then on just more broadly to the point on the the dam break, 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 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?
Yes, 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 in and are certainly always prepared in a scenario like we're in now to increase talent and increased focus on that area, should we see the market start to come back to us with respect to underwriting credit metrics, no changes at all.
If we continue to operate with an average FICO of right around [ $76.8 million ], 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, and we're making no changes to our underwriting standards. If anything, in the last 2 years, we've tightened them somewhat.
So, what we're really speaking to is just, again, what we're hearing from our bankers in the market and this belief that psychologically, if we hit something with a 5 handle there could be some upside. And to the point that's already been made that is not currently contemplated in our projections.
Yes. Got it. Okay. I appreciate it. And if I could just sneak one more in. All this on the back half of the year 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?
Right. 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. But I will -- at the end of the day, like most banks, we would welcome an upward sloping yield curve and that will be more accretive over time. So while too early to start projecting 2025, we'll provide our guidance later but the upward solving yield curve would be certainly beneficial to our margin.
We will take our next question from Andrew Leisch with Piper Sandler.
Sorry to stick with the mortgage question for a bit because probably a ways out still. But will this be for portfolio growth or for gain on sale?
Both.
Got it.
Both sides of the...
Got you. And then Aldis, just correct me, just point of clarification here. It sounded like your line of credit, maybe the utilization rate increase. Did I hear you correctly? And if I did, I mean, how is that trending so far this quarter?
Yes, it did increase slightly, stabilized. We have, I think, 4 consecutive quarters of that coming down. And the second quarter was the first quarter of what I call stabilization, small increase, the percentage point increase. I'd say we still are about 8 to 9 percentage points below where we typically, on average, our line utilization is. So there is still, let's say, quite ways of going in terms of our clients drawing down and utilizing their line of credit. And so far in July, it hasn't, call it, gone one way or another. So I don't see any trend either direction from what I just talked about.
We will take our next question from Jeff Rulis with D.A. Davidson.
Just one quick one. The -- any -- this may be a tough one to answer, but any visibility on the kind of the BC 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 any forward-looking thing to monitor to kind of keep an eye on these or they're just going to be lumpy in nature?
Yes. I think you're probably right, and lumpy in terms of upside as well as down. This was downside, but 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. And I don't know, Aldis, is there anything else you could add to it? Again, I think from what we're seeing at a granular level, it will 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?
Yes, last part of the -- exactly if we're -- it depends on where the life cycle of the company is. And certainly, we did see a few that needed to raise capital here in the second quarter that triggered our sort of valuation adjustments. We look forward and feel good about valuations in our portfolio as we sit today.
But then again, when the next round comes double dictates, whether it's up or down. And I do agree with Tim, we feel good about our portfolio in general.
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.
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.
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.