National Bank Holdings Corp
NYSE:NBHC
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National Bank Holdings Corp
Earnings Call Analysis
Q4-2023 Analysis
National Bank Holdings Corp
As the company forges ahead with its key initiatives, it's targeted to begin friends and family testing for its 2UniFi project in the latter half of the year. This project remains on budget and schedule, suggesting a disciplined approach to product development and project management. The expenses related to 2UniFi have been carefully embedded within the current financial framework, ensuring coherence with the company’s financial discipline. Moreover, the company is not only continuing its investments in 2UniFi but also fortifying its resources in security technology. The emphasis on fraud management reflects a proactive strategy in an industry where the threat of fraud looms large. Keeping clients secure is a priority, highlighting the company's commitment to customer protection and trust.
The mortgage banking sector of the company underwent a strategic resizing in 2023, with staffing adjustments aiming to maintain profitability. Even with a leaner operation, it contributed positively to the company’s performance. Moving forward, the company is prepared to scale back up strategically as market conditions warrant, with the potential for growth contingent upon declining mortgage rates. Fee income guidance for 2024 projects stability in mortgage benefits similar to those experienced in 2023, symbolizing the company's realistic economic anticipations and prudent operational planning. Specifically, a $12 million benchmark has been set, rooted in the prior year's performance and subject to the vicissitudes of the economic landscape.
An additional investment of approximately $200 million is slated for the company’s investment portfolio within the current fiscal year, reinforcing liquidity thresholds. This is part of a larger liquidity management strategy whereby the company prioritizes short-duration, highly liquid assets rather than searching for potential incremental yield through credit risk or complex financial structuring. The company’s clarity on liquidity preferences underscore its broader risk management philosophy and operational priorities.
The quarterly provision for loan losses included about $2.5 million reserved for a specific non-performing credit, which, if resolved, may adjust the company's allowance for loan losses (ACL) to total loans ratio. Nevertheless, a sizable portion of the reserve was attributed to loan growth, reaffirming the company's confidence in its credit portfolio. The overall health of the portfolio is attested by solid performance metrics and a rigorous portfolio monitoring system, which is particularly crucial amidst economic uncertainties. These credit practices are indicative of the company's meticulous and conservative approach to credit risk.
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Good morning, everyone, and welcome to the National Bank Holdings Corporation 2023 Fourth Quarter Earnings Call. My name is Anna, and I'll 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 Good, ] 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, President and CEO, Mr. Tim Laney.
Thanks, Emily. Good morning, and thank you for joining us as we discuss the National Bank Holdings Fourth Quarter and Full Year 2023 financial results. I'm joined by Aldis Birkans, our Chief Financial Officer. Solid fourth quarter results contributed to a record full year earnings of $3.72 per share. We generated a return on tangible -- average tangible common equity of 18.23%. We focused on growing capital during the year. And in fact, our CET1 capital ratio totaled 11.89% at year-end.
We entered 2024 from a position of strength. Credit quality remains strong with just 2 basis points of net charge-offs for all of 2023. We like what we're seeing in client activity, and we continue to benefit from operating in strong markets. We remain focused on earning the full relationship of our clients, and we're prepared to navigate any economic environment that we may face. Aldis, on that note, I'll turn the call over to you.
All right. Well, thank you, Tim, and good morning. During this call, I will cover the financial highlights for both the fourth quarter and the full year as well as share our guidance for 2024. Consistent with our past practice, our guidance does not include any future interest rate policy changes by the Fed. We are cautiously optimistic about the economic outlook in our footprint markets, and our projections do not reflect the recessionary environment either. As we reported in last night's release, we delivered another strong quarter of financial performance and finished the year with a record net revenues and record net income.
For the fourth quarter, we reported net income of $33.1 million or earnings per diluted share of $0.87. For the full year 2023, our net income was a record $142 million, and we reported a solid 18.2% return on our tangible common equity. During 2023, we grew our loan book by 6.6%, improved our core deposit base and liquidity by completing the strategically important Cambr acquisition, and grew our tangible common book value per share by 10.4%.
We continue to be pleased with our bankers' continued focus on building robust new client relationships. During the quarter, our loan balances grew $220.3 million or 11.7% annualized. We operate in markets that are outperforming the broad national economic indicators in many fronts. However, for our outlook for 2024, cannot ignore the possibility for a slowing economy.
For 2024, we project net loan balance growth in the mid-single digits. Fully taxable equivalent net interest margin for the quarter was 3.95% and was helped by the receipt of a $2.9 million loan prepayment fee. Excluding this additional loan fee income, our net interest margin was still a strong 3.83%. Our total deposit beta, this rate cycle to date has been 34%. And as I already mentioned, we are not incorporating any interest rate changes in our projections. And with that in mind, for 2024, we project NBH's fully taxable equivalent net interest income to be in the $357 million to $362 million range.
In terms of asset quality, it remains strong. Our nonaccrual loan ratio improved 7 basis points to 0.37%, and our nonperforming asset ratio also improved 7 basis points to 0.42%. The fourth quarter's net charge-offs were just 2 basis points annualized, and we finished the full year also with just 2 basis points of net charge-offs.
During the quarter, we recorded provision expense of $4.6 million and increased our allowance for credit losses to 1.27% of our total loans. Most of the ACL increase was to reserve for an existing nonperforming loan. We expect to work this loan out over the coming quarters, and we believe the specific reserve taken this quarter will be sufficient to cover the associated loan charge-off. Total noninterest income for the fourth quarter was $16.1 million, and for 2024, we project our total noninterest income to be in the range of $67 million to $72 million.
Noninterest expense for the fourth quarter totaled $62.1 million and was slightly elevated due to various nonrecurring items totaling approximately [ $1 ] million.
Looking ahead for 2024, we project our total noninterest expense to be in the range of $253 million to $258 million. Most of the linked year interest expense -- sorry non-interest expense increased is driven by the continued investment in 2UniFi, which is projected to contribute approximately $10 million of the increase. The fourth quarter's 14.9% effective tax rate was lower than the prior quarter due to an additional $2 million of research and development tax credits. These tax credits are related to the 2UniFi buildout, and we expect to realize a similar amount in 2024. As such, we project 2024s effective tax rate to be in the 19% to 19.5% range.
As always, this projected tax rate excludes the FTE adjustment on interest income. In terms of capital management, we ended the quarter with a strong 8.96% TCE ratio and a 9.74% Tier 1 leverage ratio. As I already mentioned, tangible book value per share grew 10.4% during 2023 to $22.77. In terms of the share count, we project diluted shares outstanding to remain around 38.1 million shares. And with that, I will turn it back to you.
Thank you, Aldis. While we believe we're well positioned to deliver solid results during 2024 while also making meaningful investments that we believe will future improve our company. As previously discussed, we had a focus on building capital during 2023. We now believe we're well positioned to support organic growth, M&A activity and buybacks, should the opportunity present themselves.
Having said this, I want to be clear that we'll prudently manage capital and liquidity as we prepare for a broad range of economic environments.
On that note, Anna, I'll ask you to open up the call for questions.
[Operator Instructions] We'll now take our first question from Jeff Rulis with D.A. Davidson.
Tim. Wanted to circle back to your sort of last comment there on capital and loop in -- all this is kind of flattish share count. I guess on the -- Tim, you mentioned the focus this year has been building capital, and you kind of talked about you can support a number of options in '24. Did that flattish share count assume that you think you'll be active on the buyback front? I just wanted to clarify what that meant.
No, not necessarily, actually, it seems that we will not be active. We don't really issue that many shares throughout the year. So it feels like the fully diluted share count is going to be staying unchanged, and it does not incorporate any M&A and/or buyback activity. Said another way, obviously, flat unless we do have the opportunity to buy back at the right price.
And Tim, just on the kind of M&A, I don't know if that's any more attractive pullback in rates, and I guess, some assumption that deals can come together if fair value is less of a headwind. But any thoughts on your conversations about kind of M&A appetite?
Well, I think you hit the nail on the head. It's all about getting to fair value. And we were purposeful and really not working the pipeline in 2023 as we closed out '23, we began to resume conversations and I would describe our M&A focus as being very targeted. And maybe I should leave it at that.
Fair enough. And then kind of to the past the deals that you have acquired and looking at that loan growth outlook, how have some of those kind of newer acquired markets performed from a growth standpoint? And maybe if you could just touch on the growth broad-based in the footprint if there are some areas of particular strength.
As it relates to the last 2 acquisitions, we remain very pleased with the Utah-based Rock Canyon acquisition and the Wyoming Jackson Hole based Bank of Jackson Hole. I will say as it relates to the Bank of Jackson Hole because we do have more conservative house limits on how much commercial real estate will hold. It created a lot of work for our teams as we balanced our other commercial real estate production in the company with what we do in Bank of Jackson Hole, and I'm pleased to say that the teams hit their objectives in terms of not only reducing exposure, but getting us to a point where we have capacity for our best clients as we enter 2024. So I think we're in a good position there. As it relates to Rock Canyon, a lot of the [ earnings ] coming out of Rock Canyon are being applied to the rest of our organization as it relates to the generation of SBA business, while SBA loan sales right now are not exactly top of market. We believe that timing may be okay and that it's giving us the opportunity to really build out that capability throughout our franchise. And I think that could be a very nice growth contributor for us as we look down the road.
In fact, we're on the verge of making some pretty serious organizational changes as that next step -- as the next step in supporting that particular growth. In terms of markets, I'm really proud of our team in the Midwest based out of Kansas City. We've seen really nice growth coming out of that market. We've historically described that market is kind of middle of the road, solid player. But that's a market that's really stepped up. Jokingly say, I think it's got something to do with Taylor Swift and The Chiefs. But there is momentum in that market that we're benefiting from. Front Range of Colorado was pretty obvious. Utah is pretty obvious. We like what we're seeing in terms of potential in Idaho now as we've entered that market through the Bank of Jackson Hole acquisition. And we would like to do more in Texas, whether that's through acquisitions or organic growth or both.
Tim. And one last one, if I could squeeze it in there for all this. Just on the margin, if you could just remind us -- I know that the outlook didn't incorporate Fed moves, but just up-down sideways on impact of maybe no cuts, 3 cuts, 6 cuts this year, just to kind of frame up what you think the impact to margin in a vacuum would be?
Yes. Well, in a vacuum, I'll say that the way we model and will be part of our K disclosure that we are rate neutral. So we've closed out all of our asset sensitivity that we had over the last several years. In that theoretical model world, we would not benefit or be hurt by rate movements up or down, for that matter. But the reality, as we all know, we'll see how the deposit pricing moves and loan volumes come on, obviously, because the ability to grow the earning assets is a big contributor to maintaining margin where it is today as well.
Okay. But a good jump-off point would just be that 383. Is that what you'd point to core that going into [ 2024 ] [Technical Difficulty]
That is correct. 383 is what we'll be jumping off into 2024. One thing I will say that we did, purposefully ran off our investment portfolio during the second half of 2023 in order to maintain the less than $10 billion asset size by December 31. I do expect to rebuild that investment portfolio by about $200 million in addition to where we sit today. That clearly is a lower-yielding asset that's coming on. So that might impact that calculation of percentage calculation for margin, which is why really geared towards giving the net interest income of the guidance for this year.
We'll now take our next question from Matt Fedorjaka with KBW.
I know you're a little bit limited on what you'll disclose about Cambr, but I was wondering if you could give any color on maybe how you're using it and if it was able to be used to help fund some of the strong loan growth that we saw this quarter?
It has certainly been a contributor to liquidity. Cambr is performing within expectations. We're making additional investment in Cambr that will give us even more flexibility with Cambr as we march through 2024. And that will translate into not only continuing to be a source of liquidity, but actually enhancing fee income for the bank as we develop out those capabilities. Aldis, what would you add?
I think you summarized it well, I'll say that in the fourth quarter, if you look at our deposit growth, that was not generated on balance sheet. It was not generated from Cambr. That was our organic growth in the market footprints that we are in, but you summarized well Tim.
Wondering if we could touch on maybe noninterest-bearing deposits. I know we've seen a lot of banks here seeing some outflows. Has this had slowed down at all towards the end of the year and into January at all? Are you seeing the pace of decline slow down at all?
We've definitely seen a slowdown in the pace of outflows if you call that whether it's stabilizing here or not, it's almost a daily adventure as you come in and see how the accounts are being utilized from the debt [indiscernible] and ACA trials in the morning. So whether we call it bottom here, I don't know, but we've certainly seen a significant slowdown in the flows out.
And then if I could just sneak one more in here on credit. Obviously, everything is looking great and you guys had a great year on credit. Just wondering if -- I know you're not assuming a recession. But if we do get some more problems here in 2024, what will you be watching more closely?
Well, as a reminder, we do stress test our portfolio twice a year with our internal team once a year with an external team the [ second ] and it helps us because it's a very granular review. It helps us proactively identify emerging issues. And so our position has always been to take these issues and deal with them as rapidly as possible with the fundamental belief that problems in banking don't tend to age well. So as we stress test into different recession or economic downturns, I can tell you, even in the worst of scenarios, and that's where we're talking about a scenario worse than the Great Recession, the company still comes out on the other side of that well capitalized.
So we feel like we're well positioned, and the teams are vigilant. I would make the case that a fair amount of the business that's being underwritten in the current environment will end up being some of the strongest business in the portfolio because it is being underwritten to more conservative standards than even in the past. It's being underwritten with an expectation that rates could go even higher and so I'm particularly pleased with what I'm seeing in terms of coming on new business. And certainly, the age portfolio, as you can determine from the credit metrics is performing quite well.
[Operator Instructions] We'll take our next caller, who is Andrew Terrell with Stephens.
Maybe just to start, Tim, on 2UniFi. I wanted to get a sense here on whether or not, I guess, one, are there any expectations baked in the fee income guide you provided or the expense guide you provided? Are there any expectations of incremental revenue or expense saves from 2UniFi within that guidance. And then I think if I recall, correctly that you would be in friends and family testing in 2024. Can you just talk about kind of your expectations in 2024 for 2UniFi, kind of what are you working towards or hoping to accomplish throughout this year?
Andrew. Your memory serves you well, that's exactly right. We're targeted to go into friends and family testing in the second half of this year. I'm pleased to report that all of the work around 2UniFi is on budget and on time, and we grow increasingly encouraged by what we're seeing in terms of the unique capabilities that are being built. I suspect a number of my 2UniFi teammates are listening in. And so I'll just make this public statement that it's our intention to be out sometime in the second half of this year and something that might simulate a road show where we'll be going very deep on 2UniFi. And I can tell you we're excited to share more at the right time.
Again, the expenses have been embedded. What I'm pleased with there is that we continue to manage overall company expense while not only making investment in 2UniFi, but as I referenced earlier, continuing to invest in Cambr as well as continuing to invest, in particular, in security-based technology. If you ask me what I think the industry should be worrying about in '24? I would put fraud and the increasing activity around fraud on the list first with credit below that. So we are just hyper-focused on fraud management, protecting our clients and protecting the bank.
That's very helpful, Tim. I really appreciate all the color there. If I could ask maybe another on just the mortgage business. Can you remind us, just as volumes have kind of come down over the past couple of years. Have there been any changes you've made within your mortgage business. And I'm really just trying to get a sense of how you think about kind of potential upside there, should rates come down and mortgage rates come down as well?
Yes. We, in fact, have. I'm proud of the mortgage banking leadership team. They probably do some of the more difficult work in times like these. And that they've made a commitment to never losing money in that business. And the only way you can support that commitment is during slow times is bring down your staff. And so they methodically brought down staffing over the course of 2023. And in fact, we're a positive, albeit smaller than we've seen historically. But in fact, we're a positive contributor during the year. So that leads to the second part of your question, which is they also and again, I think this is why the their jobs are interesting and challenging. At the same time, are continually recruiting and looking at building a pipeline to bring the right mortgage bankers back online at the right time. So, I don't know, Aldis, anything you would add to that.
Yes. Well, I'll say in terms of my fee guidance for the 2024 embedded in there is mortgage benefit or mortgage income that is similar to what we recognized in 2023. So I'll let you kind of make judgment calls from there, whether -- how the economy evolves and what the upside potentially could be there.
And Andrew is exactly right. I mean the reality of it is if rates drop, we'll see greater activity. We're in -- we're certainly in markets that support the business and we need to see downward rate movement to really realize that full potential.
Okay. And Aldis, you said in the '24 fee income guidance, a pretty stable level to this, $12 million or so of mortgage banking in '23.
That's correct.
We'll now take a question from Andrew Liesch with Piper Sandler.
Aldis. On these -- on the rebuild of the securities book, how do you plan to fund those repurchases? Is it going to be just some of the cash you have on hand? Or are you going to go raise deposits to complete that?
It's going to be a combination of -- I think we'd be sitting a little too much cash still from March of last year type of perspective. So it does not need to be as much cash on day to day. So we'll probably repurpose some of that into investment portfolio. And then we'll go ahead and raise additional deposits to fund for increasing balance sheet there.
And again, for us, we use investment portfolio just a reminder. I know everybody here knows on this front. But we don't look for incremental necessarily yield due to credit or structure or whatever on investment portfolio. We look for liquidity and [ that's a ] a store of liquidity for us and therefore, maintaining short duration and highly liquid asset is what we do. And from how we manage liquidity and model liquidity, it just implies that we need, call it, another $200 million for the rest of this year in growth in this book to maintain our liquidity thresholds.
And then is there any detail you can provide on the reserves that you set aside for that nonaccrual loan, I guess, maybe how long it's been you've identified it. And what drove the increased provision this quarter as far as like just monitoring collateral or any update in their business?
Yes. Maybe I'll start at a high level. And I'll reference a cooperative loan that we were discussing at the end of the third quarter. That has been resolved. We've had one other operating entity that you're referring to that we're dealing with now. I will say we're dealing with it in partnership with another bank, and it's moving a little more slowly than we would typically like but I fully expect it to be resolved in the first half of this year, strong collateral, strong operating potential. And again, believe we can have it resolved in the first half of this year. Aldis, you want to cover any more detail?
Yes. I'll just say of the provision expense of $4.6 million embedded in there was approximately $2.5 million of specific reserve related to this credit. And sometimes the credit is being worked out, that certainly would become a charge-off, but our ACL to total loans accordingly would drop by that percentage point or basis points, too. So we would be fully reserved for it. The ACL to total loans is a little inflated because of that additional specific reserve.
Got it. But it still seems like a decent portion of the allowance quarter was also for growth. Is that right?
Absolutely.
Absolutely. Yes.
Okay. Nothing else that you're seeing in the portfolio?
No. I mean, look, the -- as evidenced by performance in 2023 as well as all of our credit metrics, the portfolio and the whole remains very strong. And our vigilance around portfolio monitoring is at an all-time high, given uncertainty around economic outcomes. So I feel like we've got a good handle on it.
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. And just quickly, we'll say thanks to everyone for joining today and for your interest in National Bank Holdings. Have a good day.
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.