National Bank Holdings Corp
NYSE:NBHC
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National Bank Holdings Corp
Earnings Call Analysis
Q3-2024 Analysis
National Bank Holdings Corp
National Bank Holdings Corporation reported robust financial performance for the third quarter of 2024, achieving earnings of $33.1 million or $0.86 per diluted share. This marked a return on average tangible assets of 1.4% and a return on average tangible common equity of 14.8%. The strong results were primarily driven by disciplined deposit and loan pricing, alongside significant fee income generation. Moreover, the bank's fully taxable equivalent net interest income surged by an annualized 20%, reflecting growth in average earning assets and an improved net interest margin. The margin expanded to 3.87%, up 11 basis points from the previous quarter.
As the bank anticipates the fourth quarter, it projects a slight decline in noninterest income, estimating a range between $16 million and $18 million, largely due to seasonal factors. However, it expects the net interest margin to hold steady in the mid 3.8% range. This guidance indicates the bank's continued focus on maintaining margins while managing deposit costs effectively.
National Bank is improving its credit quality metrics, successfully decreasing its nonperforming loan ratio to the lowest level since early 2023. The bank experienced only minor charge-offs, with an annualized net charge-off rate of just 18 basis points for the quarter, reflecting effective risk management. The allowance to total loans ratio stood comfortably at 1.23%, which provides a cushion for potential loan losses based on changing economic conditions.
The focus on growing noninterest income bore fruit, as the bank reported $18.4 million in this category, an increase of $4.4 million from the prior quarter. This growth stemmed from improved treasury management fees and other fee-based businesses. The bank anticipates continued positive momentum in fees, with expectations for upward growth in service charges and trust-related income services.
In response to evolving market dynamics, National Bank is investing substantially in technology initiatives, specifically its 2UniFi platform, which aims to transform banking services for small and medium-sized businesses. This commitment included an anticipated increase in noninterest expenses, projected for the upcoming quarter at $64 million to $66 million. Despite this, the bank's tangible common equity ratio remained a strong 12.9%, highlighting its solid capital position.
The bank's leadership remains optimistic about its capital build-up, leveraging its robust CET1 capital ratio and seeking out strategic partnerships where cultural alignment and risk management philosophies coincide. The bank continues to explore opportunities for expansion, particularly in higher growth markets such as Utah and Texas, where it seeks to deepen its market presence.
National Bank’s proactive measures in managing deposit pricing illustrate its readiness for changing interest rates. The bank recently reduced its deposit costs ahead of anticipated rate cuts by the Federal Reserve and estimates that its cost of CDs could peak soon. Leadership expressed confidence that they can navigate future rate changes effectively without significantly impacting margins.
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Good morning, everyone, and welcome to the National Bank Holdings Corporation 2024 Third 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 will now turn the call over to Emily Gooden, Chief Accounting Officer and Director of Investor Relations.
Thank you, Anna, 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 and CEO, Mr. Tim Laney.
Well, thanks, Emily. Good morning, and thank you for joining us as we discuss National Bank Holdings' Third Quarter 2024 financial results. I'm pleased to be joined by Aldis Birkans in his newly appointed role as President of our company, as well as Nicole Van Denabeele, our newly appointed Chief Financial Officer. You're all familiar with Aldis. And while Nicole is new to many of you, she's been with our company for over 6 years. She began her career with Deloitte and has 21 years of experience in the industry. Most recently, Nicole served as our Chief Accounting Officer.
Moving on. We delivered solid earnings for the quarter on the back of disciplined deposit and loan pricing as well as strong fee income generation. Aldis is going to provide color on loans and deposits, but I do want to recognize our bankers' disciplined approach to deposit and loan pricing. Finally, we believe the loan portfolio remains very strong.
And on that note, I'll turn the call over to Nicole for her first earnings call.
Thank you, Tim, and good morning. I'm pleased to have this opportunity and to join the call today. During today's call, I will cover the quarter's financial highlights as well as our guidance for the remainder of the year, which does not include any future interest rate policy decisions by the Fed. For the third quarter, we delivered earnings of $33.1 million or $0.86 of earnings per diluted share. This resulted in a return on average tangible assets of 1.4% and a return on average tangible common equity of 14.8%. On a linked quarter basis, we grew our fully taxable equivalent pre-provision net revenue by 20.6%. The quarter's strong financial performance was highlighted by an increase in our fully taxable equivalent net interest income of 20% annualized, driven by average earning asset growth and net interest margin expansion.
Fully taxable equivalent net interest margin was 3.87%, expanding 11 basis points during the third quarter. We expect that our discipline -- that our bankers disciplined, proactive efforts to manage deposit pricing will continue through the cycle. And as a result, we project our fourth quarter's net interest margin to remain in the mid [ 3.8 ]. Deposit balances during the quarter grew $120 million on a spot basis and grew $21 million in average balances.
Turning to credit quality. We continue to bring down our nonperforming loan ratio during the quarter to the lowest level since early 2023. We resolved one previously reserved credit during the quarter, resulting in 18 basis points of annualized net charge-offs for the quarter or just 13 basis points for the year. The quarter's provision expense of $2 million was primarily driven by changes in the CECL models underlying forecast, specifically the unemployment rate outlook. The allowance to total loans ratio ended the quarter at 1.23%. We continue to hold $24 million of marks against our acquired loan portfolio, which adds an additional 32 basis points of loan loss coverage if applied across the entire loan portfolio.
Noninterest income for the third quarter was a strong $18.4 million, an increase of $4.4 million over the prior quarter. Our teams are generating nice growth in treasury management fees and within a number of our fee-based businesses, which Aldis will cover in more detail.
Looking ahead to the fourth quarter of 2024, we project noninterest income to be in the range of $16 million to $18 million, which is expected to decline slightly from the third quarter as a result of seasonality. Noninterest expense for the third quarter totaled $64.2 million, increasing over the second quarter as a result of our continued investments in technology and one additional payroll day in the third quarter. The linked quarter 2UniFi-related expenses increased approximately $0.7 million, and we will continue to grow our investment in 2UniFi in future quarters. We project fourth quarter's noninterest expense to be in the range of $64 million to $66 million.
In terms of capital, we continue to grow our excess capital with the TCE ratio ending the quarter at 9.8%, Tier 1 leverage ratio at 10.4% and CET1 capital ratio at 12.9%. Tangible book value per share grew 5%, ending the quarter at $24.91.
With that, I will turn it over to Aldis to provide more detail around the performance of our business.
Thank you, Nicole, and good morning. In terms of loan growth, loan fundings totaled $359 million with a weighted average rate of 8.5%, driving a 12 basis point increase in total loan portfolio yield. That, combined with average loan balance during the quarter, contributed nicely to both net interest income growth and NIM expansion. On a spot basis, our loan portfolio ended the quarter fairly flat as many of our clients decided to push their funding needs in anticipation of a lower rate environment.
We entered the fourth quarter with a robust pipeline that are quite granular and diversified across most of our lines of business. And as I mentioned during last quarter's call, we are seeing a modest rebound in our line utilization, pointing to a solid fourth quarter.
As Nicole already touched on this, during the quarter, we made good progress in addressing our nonperforming assets with nonperforming loans decreasing by 3 basis points on a linked-quarter basis and 13 basis points since the last year's third quarter. Our total criticized loans decreased $18 million during the quarter. Having said that, there are several credits that impacted our 30-day past due bucket. Our teams are working closely with their respective clients, and we expect to make meaningful progress during the fourth quarter. Our strategy with respect to pricing on both loans and deposits is showing signs of success in what we are seeing in margin improvement. While the Fed rate cut did not come until late in the quarter, we were proactively addressing certain deposit categories well in advance of the Fed meeting driving a decrease in our transaction deposit costs. We also project the cost of our CDs to peak within next quarter or 2.
We ended the fourth quarter with a significantly lower deposit run rate, which will provide an offset to any impact from the short-term rate decrease on our variable rate loans.
I'm also delighted to highlight the progress our teams have made in growing core banking fees. During the quarter, we increased our service charges by 14% through both new client additions as well as rationalization of various treasury management products. We believe there is more upside to this line item over the course of next few quarters. Similarly, our efforts to grow trust in both business, Cambr fees, SBA and swaps fees are paying off nicely as these line items have added 31% within the other noninterest income growth since the third quarter of 2023. We entered the fourth quarter with our balance sheet well positioned to provide for great flexibility with respect to supporting near-term loan portfolio growth as well as other strategic initiatives.
Tim, I'll turn it back to you.
Thank you, Aldis. We continue to build capital at an accelerated pace, which provides us with meaningful strategic options. We believe that the strength of our capital, liquidity and credit positions leave us well positioned to execute on the right strategic opportunities. And the development of 2UniFi ranks high among those opportunities, and we remain convicted that 2UniFi has the potential to change the way small and medium-sized businesses access the U.S. banking system. In fact, speaking of 2UniFi, we began live client testing next month here in November. On that note, let's open up the lines for questions. .
[Operator Instructions] We'll take our first question from Jeff Rulis with D.A. Davidson.
Just a question on the margin. Maybe Nicole, do you have the quarterly average -- excuse me, the September margin average versus the quarterly?
Yes. Jeff, September's monthly margin did come in higher than our Q3 margin. Our Q3 margin was 3.8%. We did see benefit to September's monthly margin as a result of our bankers' proactive efforts to bring down our cost of deposits, and we saw an improvement in our cost to deposit rate in September.
Okay. And that outlook of kind of a mid -- I think you said mid 3.8, maybe we could just walk into -- I know that, that forward look doesn't assume additional cuts, but kind of where you're positioned from a margin perspective into '25, the puts and takes there sounds like a proactive deposit cost approach, but also, should we see additional cuts, what's the expectation there?
Yes. Jeff, this is Aldis. As you know, we are fairly asset neutral or liability neutral in this instance, so we don't expect huge benefits or decreases in margin from near-term rate cuts. Therefore, our guidance of [ 3.5 ] and mid 3.8s is good for now and stepping into the next year. .
And as we always do, from the fourth quarter earnings call, we'll be providing more robust guidance for the next year.
And I think it's reasonable to assume that both the loan yields as well as deposit costs are probably again, before any further rate cuts are trending about 10 basis points better than what you saw in the third quarter.
Tim, on the capital front, seeing the dividend increases here, capital continues to build. If you could just touch on the priorities from here as we look forward. I know that optionality is a big one with you, but I just want to check in on all tools from the capital side.
Well, we are certainly prepared to partner with the right institution where the culture fits, where the strategy makes sense. And we've again, feel well positioned to execute on that front. So that's exciting. Will continue, as I've mentioned in my prepared comments, we'll continue to invest in 2UniFi. And my expectation is that when we do provide next year's guidance, we'll clearly delineate the investment we'll be making throughout the year in 2UniFi. So you can begin to look at the way I think about it is what is the core efficiency of the bank and then what is this investment for the future in the second bank, which is really 2UniFi. Beyond that, candidly, we're not in the buyback market at these prices. We think we're fairly traded and our attitude is we like to buy when things are on sale. So that probably would not be on the radar screen right now.
We'll now take our next question from Kate Ashley with KBW.
This is Kate on for Kelly Motta. Yes. So I was just wondering the best opportunities that you guys are seeing for loan growth booked by type and region.
I think, as I mentioned, our pipelines are quite diversified. So it really it spans across our footprint geographically as well as the middle market to our specialty lines. So nothing stands out at the moment as it one driving force. Certainly, credit is most important today, and it's being viewed very carefully and how much of that pipeline pulls through will depend on that. But it is a well-diversified portfolio -- a pipeline right now.
We'll now take our next question from Andrew Terrell with Stephens.
Just to start, Aldis or Nicole, anything unique in terms of the originated loan yields this quarter, up 16 basis points. It was a little bit more than I expected. Just anything uniquely should appreciate, whether it's elevated fees or recovery or anything in there?
We continue to be very disciplined with our loan rates, and we did have originated loan rates with a weighted average yield of 8.5% for the third quarter.
There are no prepays or anything else that is impacting those -- there's no one-offs if that's what you're trying to ask Andrew.
Yes. Okay. So mainly just reflective of the strong new origination yields.
That's right.
Got it. Okay. And then I'd be curious to hear kind of your perspective, you were preemptive in lowering some of these deposit rates prior to the Fed cutting rates. I'm just curious, like in your conversations with clients, what if any type of pushback you've received throughout that process and how that influences if we are to get a couple of incremental rate cuts throughout the fourth quarter, how that influences any type of strategy change and how you're looking to manage costs around those future cuts?
Look, we're continuing to have conversations with clients around lowering deposit rates. And as a practical matter, we work with our clients as rates moved up and they understand it's got to be a win-win situation. They weren't working with us as we move down. And we've had very little pushback, frankly, to the point of surprising us, but we knew it was the right thing to do. Our clients have worked with us and again, very little pushback.
So I'll say again, it gives me the opportunity to really share my appreciation for our bankers and their discipline, and while they may have been pushed to get out there, they had to have the courage to have those conversations and the relationships they have, and they've done a nice job.
Yes. Understood. Okay. And if I could ask just one more, on the Cambr deposits. Can you just remind us or provide any kind of color around the contractual kind of repricing opportunity here? Is there any term to these deposits? Or should we effectively just be viewing Cambr source deposits as essentially a floating rate? .
They are, I would call a managed rate deposits. There is no contractual linkage for most of them, there's exceptions, of course. But for most part, these are managed rates just like our other client deposits. And they were part of that conversation, as Tim mentioned, in terms of having to reach out and they were beneficiaries in the way up, and they're working with us on the way down.
We'll move to our next question from Andrew Liesch with Piper Sandler.
Yes, Aldis and Nicole like to extend my congratulations as well. Tim, you got a footprint that covers several states. If you look at the potential M&A opportunities out there, are there locations that you want to be in? Are there locations you want to be deeper in? I'm just trying to get a sense of when you look at the franchise today, what other sort of -- what targets you might find interesting?
Sure. We would love to do more in Utah. We would love to do more in Texas. Our overreaching focus as it has always been is only moving into markets that are growing faster than the national averages, and that's across a broad set of metrics. Frankly, that principle has served us well since the founding of the company, and we will continue to adhere to it. And then beyond that, it really does become more about the precision around the matching of cultures and the strategies. We feel very strongly mindsets around credit risk management have to be similar. And there are just a few nonnegotiables, and that would be one that's at the top of the list.
Got it. Makes sense. And then just a couple of follow-up questions on the noninterest income, the seasonality that you discussed on the call, is that largely in the mortgage banking line? Or is there other seasonality that we should be aware of?
You're correct. That is largely within the mortgage banking line. I do want to point out that we are on track to meet our full year projection for noninterest income, excluding Q2's onetime charge. As you mentioned, the seasonality is related to mortgage and there is some seasonality there as well for bank [indiscernible].
Got it. All right. Helpful. And then what tax rate should we be using going forward?
Yes. The best indicator for our tax rate is the year-to-date rate through 9/30, which was 18%, and we are projecting a full year effective tax rate in the range of 18% to 19%.
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.
Very good. I'll simply say thank you for joining us today. Have a good day and the rest of the week. Take care.
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.