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spk01: Good morning, everyone, and welcome to the National Bank Holdings Corporation 2023 Fourth Quarter Earnings Call. My name is Anna, and I will be your conference operator for today. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to Emily Gooden, Director of Investor Relations.
spk00: 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.
spk02: 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 Aldous Berkins, 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 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 enter 2024 from a position of strength. Credit quality remains strong with just two 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. Aldous, on that note, I'll turn the call over to you. All right. Well, thank you, Tim, and good morning.
spk03: 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 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 87 cents. With a full year of 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 Canberra 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 on many fronts. However, 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 held 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 to $362 million range. In terms of asset quality, it remains strong. Our non-accrual loan ratio improved seven basis points to 0.37%. And our non-performing assets ratio also improved seven basis points to 0.42%. The fourth quarter's net charge-offs were just two basis points annualized, and we finished the full year also with just two basis points of net charge-offs. During the quarter, we recorded a provision expense of $4.6 million and increased our allowance for accrual losses to 1.27% of our total loans. Most of the ACL increase was to reserve for an existing non-performing 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 non-interest income for the fourth quarter was $16.1 million, and for 2024, we project our total non-interest income to be in the range of $67 to $72 million. Non-interest expense for the fourth quarter totaled $62.1 million and was slightly elevated due to various non-occurring items totaling approximately $1 million. Looking ahead for 2024, we project our total non-interest expense to be in the range of $253 to $258 million. Most of the lengthier non-interest expense increase is driven by the continued investment into Unified. 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 Unified Build Out, and we expect to realize a similar amount in 2024. As such, we project 2024's 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 the alluded shares outstanding to remain around 38.1 million shares. And with that, I will turn it back to you.
spk02: Thank you, Aldous. Well, we believe we're well-positioned to deliver solid results during 2024 while also making meaningful investments that we believe will future-proof 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 buyback 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, Ana, I'll ask you to open up the call for questions.
spk01: Yes, sir. Thank you. And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 if you would like to ask a question. And we'll pause for just a moment. All right. And we'll now take our first question from Jeff Ruiz with D.A. Davidson.
spk06: Thanks. Good morning. Tim, I 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.
spk03: 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.
spk02: Said another way, obviously, flat unless we do have the opportunity to buy back at the right price.
spk06: Okay. And Tim, just on the M&A, I don't know if that's... any more attractive, you know, pullback in rates? And I guess some assumption that deals can come together if fair value is less of a headwind. But any thoughts in your conversations about kind of M&A appetite?
spk02: Well, I think you hit the nail on the head. You know, it's all about getting to fair value. And, you know, we were purposeful when 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.
spk06: Fair enough. And then, you know, kind of to the past focus, 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.
spk02: Yeah. As it relates to the last two 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 learnings 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 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 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 a middle-of-the-road solid player, but that's a market that's really stepped up. I 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. The front range of Colorado is pretty obvious. Utah is pretty obvious. uh 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 uh we we would like to do more in texas whether that's through acquisitions or organic growth or or or both thanks tim and one last one if i could squeeze it in there uh for all this just on the margin if you could just remind us what
spk06: I know that the outlook didn't incorporate Fed moves, but just up down sideways on impact of maybe no cuts, three cuts, six cuts this year, just to kind of frame up what you think the impact to margin in a vacuum would be.
spk03: Yeah. 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 asset is a big contributor to maintaining the margin where it is today as well.
spk06: Okay. But a good jump-off point would just be that 383. Is that what you'd point to core, kind of going into 2015?
spk03: That is correct. The 383 is where we're 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. clearly is a lower yielding asset that's coming on. So that might impact that calculation of percentage calculation for margin, which is why I really geared towards the giving the net interest income as the guidance for this year. Perfect.
spk07: Yep, I got you. Thank you.
spk01: We'll now take our next question from Matt Fedorocka with KBW.
spk04: Hey, guys. Good morning. Hey, good morning. I know you're a little bit limited on what you'll disclose about Camber, 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.
spk02: It has certainly been a contributor to liquidity. Camber is... performing within expectations. We're making additional investment in Canberra that will give us even more flexibility with Canberra as we march through 2024. And that will translate into not only continuing to be a source of liquidity, but actually enhancing the income for the bank as we develop out those capabilities. Aldous, what would you add?
spk03: 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 Canberra. That was our organic growth in the market footprints that we are in. But you summarized it well, Tim.
spk04: Great. Thanks for that. I'm wondering if we could touch on maybe non-interest-bearing deposits. I know we've seen a lot of banks here seeing some outflows. Has this 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?
spk03: 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 daily adventure as you come in and see how the accounts are being utilized from the night before and the ACH files 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.
spk04: Okay, great. And if I could just sneak one more in here on credit, obviously everything's looking great and you guys had a great year in 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?
spk02: Yeah, 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 been 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.
spk07: Awesome. Well, thank you for answering all the questions. You bet. Thank you, Matt. Thanks, Matt.
spk01: And once again, that is Star 1. If you would like to ask a question, we'll take our next caller, who is Andrew Terrell with Stevens.
spk07: Hey, good morning. Good morning.
spk08: Maybe just to start, Tim, on 2Unify, 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 provide or the expense guide you provide? Are there any expectations of incremental revenue or expense saves from to Unify 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 to Unify? Kind of what are you working towards or hoping to accomplish throughout this year?
spk02: 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 2Unify 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 two Unify 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 in something that might simulate a roadshow where we'll be going very deep on to Unify. 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 into Unifi, but as I referenced earlier, continuing to invest in Canberra, 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.
spk08: That's very helpful, Tim. I really appreciate all the color there. If I got to 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.
spk02: Yeah, 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 in 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. 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?
spk03: Yeah, 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, you know, how the economy evolves and what the upside potentially could be there.
spk02: And Andrew's exactly right. I mean, the reality of it is if rates drop, we'll see greater activity. We're certainly in markets that support the business, and we need to see downward rate movement to really realize that full potential. Okay.
spk08: Okay, got it. That's really helpful. And as you said, in the 24 fee income guidance, a pretty stable level to this, call it $12 million or so of mortgage banking at 23?
spk07: That's correct. Perfect. Well, thank you for taking the questions. Yep, thanks so much.
spk01: We'll now take a question from Andrew Leisch with Piper Sandler.
spk05: Hey, good morning, everyone. Good morning. All this 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 the pilots to complete that?
spk03: It's going to be a combination of I think we're sitting a little too much cash you know, 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 an investment portfolio, and then we'll go ahead and raise additional deposits to fund for increase in balance sheet there. And again, for us, we use investment portfolio. Just a reminder, I know everybody here notes on this front, but we don't look for incremental necessarily yield due to credit or structure or whatever on an investment portfolio. We look for liquidity and it's 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, you know, call it another $200 million for the rest of this year in growth in this book to maintain a liquidity threshold. Got it. That's helpful.
spk05: And then is there any detail you can provide on the reserve that you set aside for that non-accrual loan? I guess maybe how long it's been You've identified it. And what's all of the increased provision this quarter as far as like just monitoring collateral or any update in their business?
spk02: Yeah, 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
spk03: strong operating potential and again believe we can we can have it resolved in the first half of this year all this you want to cover any more detail yeah I'll just say of the provision expense of four point six million dollars and better than there was approximately two and a half million dollars that specific reserve related to this credit and you know, come time that credit is being worked out, that certainly would become a charge-off, but our ACL to toll loans accordingly would drop by that percentage point, too, or basis points, too. So we would be fully reserved for it. We are fully reserved for it. The ACL to toll loans is a little inflated because of that additional specific reserve. Got it.
spk05: So 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?
spk02: I mean, look, as evidenced by performance in 2023, as well as all of our credit metrics, the portfolio on the whole remains very strong. And, you know, 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. Got it.
spk05: Hey, that's really helpful. Thanks for taking the questions here. I'll step back.
spk07: All right. Thank you much.
spk01: 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.
spk02: 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.
spk01: 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.
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