National Bank Holdings Corporation (NYSE:NBHC) Q4 2023 Earnings Call Transcript

National Bank Holdings Corporation (NYSE:NBHC) Q4 2023 Earnings Call Transcript January 24, 2024

National Bank Holdings Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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.

Emily Gooden: 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, 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’s Chairman, President and CEO, Mr. Tim Laney.

Tim Laney: Thanks, Emily. Good morning, and thank you for joining us as we discuss 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 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 remained 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.

Aldis Birkans: 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 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 on 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 remained strong. Our non-accrual loans ratio improved 7 basis points to 0.37% and our non-performing 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 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-offs. Total non-interest 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. Non-interest expense for the fourth quarter totaled $62.1 million, and was slightly elevated due to various non-recurring items, totaling approximately $1 million. Looking ahead for 2024, we project our total non-interest expense to be in the range of $253 million to $258 million.

Most of the linked year interest expense, sorry – non-interest expense increase 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 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 19.0% 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 the 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.

Tim Laney: Thank you, Aldis. 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 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.

See also 15 Best Jewelry Insurance Companies Heading into 2024 and 15 Highest Quality Athletic Wear Brands in the US.

Q&A Session

Operator: [Operator Instructions] And we’ll now take our first question from Jeff Rulis with D.A. Davidson.

Jeff Rulis: Thanks. Good morning.

Tim Laney: Good morning.

Jeff Rulis: 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.

Tim Laney: No, not necessarily. Actually, I assume 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.

Jeff Rulis: Okay. And Tim, just on the 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 values less of a headwind, but any thoughts on your conversations about kind of M&A appetite?

Tim Laney: 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.

Jeff Rulis: 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 is some areas of particular strength?

Tim Laney: Yes. 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 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 and the Midwest based out of Kansas City. We’ve seen really nice growth coming out of that market. We’ve historically described that market as kind of 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.

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.

Jeff Rulis: Thanks, 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 what – 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.

Aldis Birkans: Yes. Well, in a vacuum, I would say that we – 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 – 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 is 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 big contributor to maintaining margin where it is today as well.

Jeff Rulis: Okay. But a good jump off point would just be that 3.83%. Is that, what you’d point to core that going into 20 –