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spk02: Good morning, everyone, and welcome to the National Bank Holdings Corporation 2024 First Quarter Earnings Conference Call. My name is Shelly, 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. Please go ahead.
spk00: Thank you, Shelley, 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, non-interest income, margins, allowance, taxes, and non-interest 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 Chairman, President, and CEO, Mr. Tim Laney.
spk04: Thanks, Emily. Good morning, and thank you for joining us as we discuss National Bank Holdings first quarter results. I'm joined by our Chief Financial Officer, Aldis Berkins. We delivered quarterly earnings of 82 cents per diluted share and a return on tangible common equity of 15.14%. Credit remains strong with zero basis points of annualized charge-offs. We experienced a slow start with loan production early in the quarter with business clients deferring action in anticipation of the Federal Reserve lowering interest rates. Once it became clear that rates were not coming down in the near future, client activity picked up and we have a very strong pipeline for the second quarter. We grew our core deposit 6.8% over the first quarter of 2023, while preserving our low deposit beta across this entire rate cycle. Expenses were well managed, especially in light of the fact that this year we are incurring over $18 million of expense related to the amortization of our investments today into Unify. And I'll cover a more detailed update on 2Unify after Aldous takes us through the quarter. Aldous?
spk03: All right. Thanks, Tim. Good morning. During this call, I will cover the financial highlights for the first quarter, as well as touch on our guidance for 2024. And just as a reminder, our guidance does not include any future interest rate policy changes by the Fed. Turning to the financial results. For the first quarter, we reported net income of $31.4 million, or 82 cents, of earnings per diluted share. The first quarter's return on tangible assets was 1.4%, and the return on tangible equity was 15.1%. During the quarter, our loan balances decreased $130 million, or 1.7%. And as Tim already discussed, the feedback we have received from our commercial clients is that many projects and funding needs were delayed with the hope of achieving lower funding This was especially evident early in the year when the interest rate cut expectations were still quite high. Similarly, our commercial lines of credit utilization entered the quarter at historically low levels. As we entered the second quarter, our pipelines are quite strong and we expect to meet our full year loan portfolio growth guidance of mid-single digits. Fully taxable equivalent net interest income for the quarter came in at $85.7 million. The linked quarter decrease was primarily driven by accelerated loan fee income of $2.9 million recognized in Q4 and one less day in the first quarter. Net interest margin in the first quarter was 3.78%. Our new loan originations during the quarter were at an average rate of 8.8% and continue to favorably benefit our earning asset yields. Our overall deposit beta, this rate cycle to date, is 37.5%. and the pressure on deposit pricing is abating. Looking ahead for the rest of 2024, we project our NEM to settle in the mid-three-sevenths. Deposit balances during the quarter grew $327 million on a spot basis and $90 million on an average balance basis. This quarter, we benefited from seasonal tax inflows in the Canberra platform deposit. As such, we paid off all of our FHLB borrowings, as these deposits are more favorable to our funding costs. In terms of our asset quality, it remains strong. During the quarter, we incurred zero basis points in HR jobs and recorded no provision expense. We increased our overall allowance-to-toll loan ratio to 1.29%, and have built sufficient reserves to support any non-accrual loan. Additionally, we still hold $26.2 million in marks against our acquired loan portfolio, which equates to approximately 35 basis points of loan loss coverage if applied across the whole loan portfolio. Total non-inch income for the first quarter was a strong $17.7 million, or a $1.6 million increase from the prior quarter. And while we saw a seasonal slowdown in service charges and bank art fees, we are gaining momentum from our fee diversification efforts driven by SBA loan gains on sale, trust income, and camber fees. This quarter, we also benefited from a $600,000 gain on the sale of a banking center building. For the rest of 2024, we project to meet our full-year guidance for the fee income of $67 to $72 million. Non-interest expense for the quarter totaled $62.8 million and included elevated payroll taxes. The U-related expense this quarter was approximately $3 million, and we continue to be on budget and on plan with our targeted rollout dates. Looking ahead for the rest of 2024, we see our non-interest expenses trending towards our original full-year guidance of $253 to $258 million. In terms of capital, we continue to grow our excess capital with a TCE ratio ending the quarter at 9.2%, in a Tier 1 leverage ratio coming in at 10%. Tangible book value per share grew 2.4%, ending the quarter at $23.32. Tim, with that, I will turn back to you.
spk04: Thanks, Aldous. Well, solid earnings resulted in tangible book value per share increasing 55 cents during the quarter, and our common equity Tier 1 capital ratio totaled 12.35% at quarter end. Now turning to 2Unify, we remain highly enthusiastic about the progress being made in the build out of a platform, a banking platform, that we believe can change the way small and medium sized businesses access U.S. banking. Additionally, we're building tools within 2Unify for these businesses that simply do not exist today. We believe 2Unify will save business owners time and money and meaningfully reduce stress in their lives. All project work is tracking the target, and we expect to be in release one user testing by the fourth quarter of this year. Shelly, on that note, let's open up the call for questions and discussion.
spk02: Thank you, and if you would like to ask a question, please signal by pressing one 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. Again, press star one to ask a question. We'll pause for a brief moment to allow everyone an opportunity to signal for questions. And our first question is coming from Jeff Rulis with D.A. Davidson. Your line is open.
spk06: Good morning. Good morning. I guess on the influx of deposits from Canberra and the related pay down of FHLB, I guess there's no expectation that those flow out. It sounded tax related, but just wanted to kind of get a sense for the stickiness of those staying on balance sheet.
spk03: Yeah. This is all this. Good morning. Obviously, we've looked at their seasonal patterns in the years before and do expect some of this to come out in the rest of the April and coming months here in second quarter. But there is certainly a certain level of that will be sticky as well.
spk04: The growing average balances across that platform is pretty impressive. So we expect that trend to continue.
spk06: Got it. Okay. And then kind of turning to the margin then, got the mid 370 guide. You know, I guess given that a pretty big FHLB, you know, drop off, if you look at kind of average interest bearing rates there, would you think about in a building loan pipeline, I guess, you know, looking more towards the back half of the year, where do you lean on terms of direction of margin? Sounds like some pretty good tailwinds to that. Just wanted to kind of check in on kind of full year expectations.
spk03: Yeah, I mean, I think as we, there's hard to give quarter to quarter. There might be fluctuations, as you mentioned, given where Canberra or DDA is low. It certainly will come down to the timing of the loan growth as well. As I mentioned, we, We are adding loans at a high 8%. That is margin accretive, regardless of how you fund it. So timing of that will matter, too. So there is certainly, you know, we set up for tailwinds for margin to maybe shift up in Q4, but don't want to get ahead of our expectations here either.
spk06: And on the related front on the NII, I think you had a guide – last quarter, are you kind of at this point kind of reassessing or should we think about that level or maybe the margin, you know, coming in? Any thoughts on the NII levels and can those, I guess, recover before maybe the margin rebounds?
spk03: Yeah, well, I think certainly, again, The earning asset, NII will be driven by earning asset growth. That's driven by loan growth. The first quarter certainly came in a bit lower than we expected given the lighter loan performance. So whether we make that up in going into the rest of the year is hard to tell towards the full NII guidance. But again, if you look at the loan growth from here, What does that do to earning asset growth, holding margin in the mid 3-7s? It will give you a pretty good estimate for the NII.
spk04: I would add that the current pipeline would suggest that by quarter end, if our teams deliver like I think they can, that will be back on plan as it relates to loan balances and then working hard to cover any NII gap from the first quarter.
spk08: Got it. Okay. Thank you. I'll step back. Yes. Thanks.
spk02: Our next question is coming from Kelly Mota with KBW. Your line is open.
spk01: Hey, thanks for the question. I apologize. I dropped off for a minute or two during the prepared remarks, and you just alluded to the loan pipeline. I was just wondering if you could share where you're seeing the best opportunities. I appreciate the color on where new loan yields are coming on. Just any sort of color as to how pipelines are shaping up now versus this time last quarter or and the mix of that pipeline.
spk04: Yeah, you know, it's largely CNI, so middle market businesses across our geography. We're seeing nice buildup in all of our major markets. And, you know, it probably is important to point out that part of what was going on in the first quarter is in addition to line usage being down, which frankly, we're still analyzing that, talking to clients, trying to understand the drivers there, we were also selectively pruning the loan portfolio. So there are targeted industries where we are proactively reducing exposure. And so you can imagine, you know, an area like transportation that represents about 3% of our total book where, you know, we're actually reducing that exposure just given the state of that industry. So we're certainly not adding new clients in that space. So, you know, core manufacturing is strong. Service related businesses are strong. I, you know, I can't really speak to a lot of activity in commercial real estate because that's, just not a focus in this market. So, Kelly, I hope that helps with a little color.
spk01: Yeah, certainly. That's very helpful. And maybe I love the color that to unify, you have version one ready for testing. in Q4. I know it's going to take some time for that to really shine through results, but as we start to think about what this platform could do, are you thinking about this as more of a fee opportunity? Will it add to balance sheet growth? Just wondering kind of how to frame the type of impact it could have to MBHC, even if we're not ready to quantify that yet.
spk04: yeah i strategically it's a great question strategically i would tell you that we should think about to unify as building a completely new business not just a fee income generator not a product but a new business a new way of banking you know for our investors we'll preserve the optionality to run the core bank and run to unify But there very well could be a time where the reality is that to unify becomes such a force in that it's doing business in such a different way that, you know, it moves out and lives its own life. I've got to say. The beauty of building it in conjunction with the rest of the bank is we are already seeing really interesting technical crossover that is benefiting and will benefit the bank in terms of better client experience, saving us money, and probably the most important example in this environment is just the level of security features that are being built into 2Unify that are largely transferable over to the core bank. Then everybody is talking about artificial intelligence and so on and so forth. And what I would suggest is that AI is only as good as its data sources And I couldn't be more impressed with the data lakes that our teams are building. In terms of functionality, this is an API-first architecture. So the beauty of being able to adjust with that flexibility is unlike anything you really find in the vast majority of the banking industry today. It will allow us to be more nimble and responsive to clients. And again, do business in ways that haven't previously been done.
spk01: Awesome. Thank you so much for the color, Tim. I will step back.
spk04: All right. Thanks, Kelly.
spk02: Our next question is coming from Andrew Leash with Piper Sandler. Your line is open.
spk04: Good morning.
spk05: Morning, guys. Thanks for taking the questions. Just a question on the Canberra deposits that came in in the quarter. I'm just curious what the funding difference might be between those and the FHLB borrowings that you paid off.
spk03: Yeah. Again, we don't necessarily talk to specific pricing, but I'll just say that if these deposits balance is persisted at the same cost versus what we paid FHOB, the difference would be a couple million dollar benefit to an annualized to our bottom line. Got it. All right. That's helpful.
spk05: And then, Tim, what's the thought process on additional M&A right now? How are conversations with prospective targets going? The Canberra deal last year, the other deals. not too far in the distant past. But I was curious on your outlook for traditional M&A right now.
spk04: Well, activity has certainly been high. And we, you know, have been clear in what we're targeting, which would be institutions in that $1 to $3 billion range in growth markets, ideally in growth markets that we know and understand. And that's where we've been spending our time
spk08: Got it. All right. Thanks for taking the questions. I'll step back. You bet. Thanks.
spk02: And our next question is coming from Jeff Rulis with DA Davidson.
spk06: Thanks. I was hoping to get a little more color on the flows of non-performing loans, link order, what kind of came in and the characteristics of those loans.
spk04: Yeah, you know, thanks for asking, because I do want to make the point that we don't believe this increase in NPAs over the quarter represents anything like a negative trend. In fact, you know, we believe NPAs will be down below 50 basis points by year end. There were just a couple of, I'll call them stagnant non-performers, that our special assets group has not moved out of the bank as quickly as, quite frankly, we expected. And they are receiving an intense amount of focus. I'll also point out that we believe that these NPAs are very well preserved for and no concern on that front.
spk06: And that's a percent of loans, Tim, that 50 basis points? Yes, yes. Okay, great. And then one more follow-up. You touched on it briefly, but the service and card revenues link quarter down, the card makes some sense, but just wanted to see what was potentially, you know, that had been kind of a hard-charging line item and just wanted to see what those, within those two, if there were any changes or seasonality impacts that hope to see those come back.
spk03: Yeah, that first quarter is all seasonality for us for both of those line items.
spk04: So, yeah, if you've compared quarter, first quarter last year to first quarter of this year, you would see that dip.
spk03: We've seen it for years. Right. So we do expect that to come back in here in the second quarter and already seeing good activity in Bankard starting month of March into here in April.
spk04: It prompts another thought we should share because a lot of our card activity relates to personal banking relationships. And another encouraging point around deposits is we started to see a nice positive movement in personal banking deposits as we closed out the quarter and moved into the second. That was certainly refreshing to see, and that will contribute to additional fee income over time as well.
spk06: I guess while we're in the weeds, the mortgage banking had a nice sequential uptick. I don't know if you want to update sort of the outlook for the year in that line item.
spk03: Not specifically. Again, it's embedded in our toll fee guidance, but I'll say that You know, and markets change, right? Even this morning, the rates are up quite a bit given the GDP numbers. But I would say that what we guided, what we embedded in our plan for gain on sale for mortgage business has been somewhat conservative. It's been at or better each month this year to our plan numbers and, you know, If, again, if a market doesn't really change that dramatically, we should be able to meet our plan numbers in that line item.
spk06: Yeah, the four-year non-interest income, guys, is great. So, appreciate it.
spk08: Yeah, of course. Thank you.
spk02: Our next question is coming from Kelly Mota with KBW.
spk01: Hey, thank you so much for letting me jump back into the queue. I appreciate the color on M&A and understanding that maybe you want to keep some dry powder for that as well as some of the other initiatives you're working on. I did see that capital did build very nicely, and you guys have been active on the buyback in the past. Just wondering how you guys are – approaching that method of capital deployment?
spk04: We're probably discussing buyback action at as high a frequency as I can recall. We do believe there could be some interesting opportunity there. We have an authorized buyback and we'll watch the market and pull the trigger if we think we're in the right place. I'll also point out that with the kind of capital growth that we're realizing, it gives us confidence that we will continue to increase our dividend twice each year and You know, we're also frankly talking about whether or not a higher dividend at this point might be appropriate. So, you know, that's another consideration.
spk01: Awesome. Thanks so much for the caller. Good to hear. I will step back.
spk08: Thanks for the question.
spk02: 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.
spk04: Thank you, Shelly. I'll just thank those of you that asked thoughtful questions and wish you all a good day. Thank you.
spk02: 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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