National Bank Holdings Corporation (NYSE:NBHC) Q4 2024 Earnings Call Transcript

National Bank Holdings Corporation (NYSE:NBHC) Q4 2024 Earnings Call Transcript January 23, 2025

Operator: Good morning, everyone, and welcome to the National Bank Holdings Corporation 2024 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, Chief Accounting Officer and 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 US 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.

Timothy Laney: Thank you, Emily. Good morning and thanks for joining us as we discuss National Bank Holdings fourth quarter and full year 2024 results. I’m pleased to be joined by NBH President, Aldis Birkans as well as our Chief Financial Officer, Nicole Van Denabeele. We delivered solid earnings of $0.86 per diluted share during the quarter and a 14.4% return on tangible common equity when adjusted for the impact of the security sales. We delivered 11.3% annualized net interest income growth during the quarter with a strong net interest margin of 3.99%. Before handing off the call to Nicole, I will point out that tangible book value grew 11% during 2024 and we exited the year with common equity Tier 1 capital ratio of 13.2%. Nicole?

Nicole Van Denabeele: Thank you, Tim. [Technical Difficulty]

Q&A Session

Operator: And to our telephone audience, please standby. It looks like we lost the connection for our presenters.

Timothy Laney: Well, we apologize. I’m not sure what happened on the line, but I was just introducing Nicole. And Nicole, I’ll ask you to take it from here.

Nicole Van Denabeele: Thank you, Tim. Good morning. During today’s call, I will cover the financial highlights for the fourth quarter and full year 2024 and share our guidance for 2025. Consistent with our prior practice, our guidance does not include any future interest rate policy decisions by the Fed. For the fourth quarter, we reported net income of $28.2 million or $0.73 of earnings per diluted share. During the fourth quarter, we announced the strategic sale of investment securities of approximately $130 million, which resulted in an after tax loss of $5 million. The proceeds from the security sale will be reinvested in higher yielding securities during the first quarter of 2025. As a result of our strategic balance sheet management, our total assets ended the year at $9.8 billion.

As Tim shared with you, adjusting for the one-time security sale loss, our net income increased to $33.2 million or $0.86 of earnings per diluted share. This resulted in an adjusted return on average tangible assets of 1.4% and an adjusted return on average tangible common equity of 14.4%. On a linked quarter basis, we grew our fully taxable equivalent pre-provision net revenue by 13.5% annualized, again after adjusting for the one-time impact of the security sale. For the full year 2024, our net income totaled $118.8 million or $3.08 of earnings per diluted share. Adjusting for the impact of the security sales, net income was $123.9 million or $3.22 of earnings per diluted share. During 2024, we maintained a strong net interest margin, generated average deposit growth of 4.7% and grew our tangible book value per share by 11%.

We continue to be pleased with our bankers’ commitment to growing client relationships and we entered the new year with solid loan pipelines. We anticipate higher levels of loan demand in 2025 and are projecting 2025’s loan growth to be in the mid-single-digits. Fully taxable equivalent net interest margin expanded 12 basis points during the quarter to a strong 3.99%. Our bankers disciplined efforts in repricing deposits resulted in a 22 basis point reduction in our cost of deposits, which more than offset the 7 basis point decline in earning asset yields during the quarter. As a result, fully taxable equivalent net interest income grew 11.3% annualized during the quarter to $92 million. As I mentioned earlier, we do not incorporate future interest rate changes in our projection.

And with that in mind for 2025, we project fully taxable equivalent net interest margin to remain in the 3.9%. Turning to credit quality. Our non-performing loan ratio remains below peer averages at 46 basis points of total loans outstanding. We charged down one previously reserved credit during the quarter, resulting in 11 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 the quarter’s loan growth and an increase in reserve requirements as a result of our CECL modeling approach. The allowance to total loans ratio ended the quarter at 1.22%, consistent with the prior quarter. We continue to hold $23 million of marks against our acquired loan portfolio, which adds an additional 29 basis points of loan loss coverage, if applied across the entire loan portfolio.

Total non-interest income for the fourth quarter was $11.1 million and included $6.6 million of pre-tax losses on the investment security sales. For 2025, we project our total non-interest income to be in the range of $72 million to $77 million. Non-interest expense for the fourth quarter totaled $64.5 million and included $1.2 million of impairment from the consolidation of three banking centers. Excluding the impairment, non-interest expense decreased $0.9 million on a linked quarter basis. 2024’s full year non-interest expenses were well managed and totaled $254 million and included $13 million of 2UniFi related expenses. Non-interest expense for 2025 is projected to be in the range of $272 million to $278 million and includes approximately $27 million to $29 million of investment in 2UniFi. In an effort to provide additional visibility, in my future remarks, we’ll break out the investment in 2UniFi from the core bank’s expense run rate.

The year-over-year increase in 2UniFi expense includes the onboarding of additional developers and the amortization of the capitalized assets. Excluding the increase in 2UniFi related expenses, core bank non-interest expense is projected to increase 3% in 2025. The full year effective tax rate for 2024, excluding excess tax benefits, was 18.5% and benefited from research and development tax credits related to the 2UniFi buildout. We project 2025’s effective tax rate to be around 19%. In terms of capital management, we continue to grow our excess capital and ended the quarter with a strong TCE ratio of 10.2%, Tier 1 leverage ratio of 10.7% and a common equity Tier 1 ratio of 13.2%. We project our share count to remain around $38.6 million in diluted shares outstanding during 2025.

With that, I will turn it over to Aldis.

Aldis Birkans: Well, thanks, Nicole, and good morning. Our strong results this quarter were driven by our focus on funding the loan growth with low cost deposits, proactively managing credits, diversifying our fee income and creating positive operating leverage through disciplined expense management. As Nicole already mentioned, our strong liquidity and capital levels allowed us to utilize Cambr deposits to reposition our investment portfolio and keep the total balance sheet below $10 billion mark, thus postponing the Durbin impact by another year. Having said that, our goal for 2025 is to grow beyond $10 billion in total assets, driven by both solid loan and investment portfolio increases. Nicole already provided guidance for the loan growth.

And I’ll just add that we project the combined cash and investment security balances to settle around 15% of the total balance sheet in 2025. In terms of the fourth quarter’s recap, loan fundings during the quarter totaled a strong $480 million, which was among the highest loan production quarters in the company’s history. However, we also experienced elevated levels of payoffs and paydowns, which I think reflects the vibrant economy, excuse me, vibrant economic activity in our footprint markets and is a good sign for 2025. Our line utilizations increased during the quarter and are showing signs of returning to their historical averages. New loan production during the quarter had a weighted average rate of 7.9%, which combined with a decrease in total cost of deposits of 22 basis points drove the net margin expansion to 3.99% for the quarter.

We are highly confident in the proactive execution of our deposit strategy. The fourth quarter’s total deposit beta was 44% as measured against the Fed target rate decrease, which is in line with the deposit beta when the rates were increasing. Overall, as we look ahead to 2025, we remain confident in our ability to deliver strong results driven by robust loan growth and the continued expansion of our core deposit franchise. Our disciplined approach to credit remains at the heart of our strategy, ensuring we balance growth with solid risk management. We believe our focus on relationship banking continues to differentiate us and allows us to deepen our client engagement and creates long-term value for our shareholders. Tim, with that, I’ll turn it back to you.

Timothy Laney: Thank you, Aldis. Well, as Nicole and Aldis have shared, we entered 2025 on solid footings. We’re pleased with the level of business activity we’re seeing in our markets and we believe we’re set up to have a nice year. Our 2UniFi team continues to build the banking marketplace of the future and the team is progressing on time and operating within budget. We began user testing in the fourth quarter and we like what we’re seeing. Finally, we continue to place a premium on maintaining optionality. We remain focused on M&A and strategic markets and with a solid base of capital, we believe we’re well positioned to take advantage of a range of shareholder-friendly actions, should they come to fruition. And on that note, I’ll ask our operator to open up the line for questions.

Operator: [Operator Instructions] We’ll now take a question from Ryan Payne with D.A. Davidson.

Timothy Laney: Hello, Ryan.

Ryan Payne: Ryan Payne on for Jeff Rulis today. On the loan front, are you seeing any changes in the competitive environment there? And any particular areas you’re targeting this year?

Aldis Birkans: No, I think the competitive environment has been competitive going into late 2024 already. So we’re not seeing necessarily or projecting any changes in going into next year. We do see quite a bit of activity. As I mentioned, in terms of paydowns, payoffs are quite active. So we do feel like there is a good economic environment that is allowing for credit generation and people looking to do business.

Timothy Laney: If I were to add anything, I would say from a competitor standpoint, we are seeing what we would deem as even more — we pride ourselves on putting ourselves in markets with pretty rational competitors. And I would just say, given the stress and uncertainty of the last 18 months, we’ve seen the market become even more rational around credit. So I think that’s what we’ve got for you, Ryan.

Ryan Payne: Got it. Okay. And on the credit front, was there a certain relationship that caused the rise in NPAs there or segment?

Timothy Laney: Well, maybe the way to I think I follow your question. The way to address it is, if I think about industry segments and exposures, we’ve previously noted, we continue to see weakness in the transportation space in particular. That’s been — if I were to point to one area that’s represented a source of concern, it would be that. Now I’ll also point out that having said that, transportation exposure represents less than 2% of our total outstandings. And then I would tell you that the other activity we’ve seen in that spaces of reason is actually small dollar exposure that was originated in one of our previous acquisitions. And frankly, we’re working to clean that up.

Ryan Payne: Got it. Okay. And last thing from me. On the planned 2UniFi expenses for this year, did I hear, is this $27 million, was that right?

Nicole Van Denabeele: Yes, that’s correct. I gave a range of $27 million to $29 million.

Ryan Payne: Got it. Okay. Thank you. I’ll step back.

Timothy Laney: Thank you, Ryan.

Operator: And we’ll now take our next question from Charlie Driscoll with KBW.

Timothy Laney: Good morning.

Charlie Driscoll: Good morning. This is Charlie on for Kelly Motta. On the funding side, deposits saw some nice relief. Any update on how you’re thinking about deposit competition and those betas as we look through 2025?

Aldis Birkans: Yeah, I’ll just mention on deposits. Again, we have the luxury on having the Cambr and move that balance on balance sheet component on and off. And we proactively took down our Cambr deposits in an effort to accommodate the investment portfolio sale paydown for the quarter — for the year end. If we were to exclude on average basis, our actually core deposits grew about $40 million and you can see the $20 million of that was or half was in DDA. So we feel good about our core deposit activity and growth there and that continues going here in 2025.

Timothy Laney: Yeah. Charlie, I would add, we feel very good about our level of treasury management activity with our business clients and I’m proud of our team in terms of the deposit pricing discipline and the courage it took to act on that deposit pricing of discipline over the last quarter or so. It obviously is making a difference.

Charlie Driscoll: Makes sense. Thank you. And then you said your plan for 2025 was to go — to grow through $10 billion. Can you remind us of what the expense impact is from Durbin? And then any other considerations around the $10 billion threshold? And maybe what size you guys think you could be at to absorb the drag as well? Thank you.

Timothy Laney: Look, we’ve avoided roughly a $10 million charge over the course of two years, five this year, five next year as a result of simply pushing it into ’25. We frankly managed our way through that process and we’ll — we would expect to quickly move beyond $10 billion in assets. I’ve talked about the $5 million a year impact. Ultimately, the Durbin expense is we’re fortunate in that we do not have high consumer exposure in the Durbin area. And so we’re frankly just managing through that impact with organic growth.

Charlie Driscoll: Awesome. Thank you. And then maybe my last question, I know you mentioned organic growth, but an acquisition could be a fast way to like get scale on one possible strategy to absorb the Durbin hit. I was just wondering if you could provide any update on pace of conversations there and how you’re approaching your capital priority?

Timothy Laney: Yeah. Charlie, your question is important because I think one thing we would point out is that obviously, we can’t provide details, but we’ve been examined as a regional bank now as though we were over $10 billion for the last two years. When we received our initial charter when we started the company, our initial regulator, the OCC required us to begin building out processes as though we were $10 billion in assets day one. While that was a pain, that legacy was painful, as we’ve approached $10 billion, it’s actually made that crossover very manageable. And we don’t expect, there’s no indication that we should expect any other major expenses related to that crossover given that we’ve got that infrastructure in place.

Could acquisition help dilute the Durbin impact, yes, but it’s so insignificant. I mean, we wouldn’t let that drive M&A activity. We’re still focused on strategic partners that share similar cultures and views toward relationship banking and we are having very constructive conversations on that front.

Charlie Driscoll: Awesome. Thank you, guys. I’ll step back.

Timothy Laney: Thank you, Charlie.

Operator: [Operator Instructions] We’ll now take our next question from Andrew Liesch with Piper Sandler.

Andrew Liesch: Good morning, everyone. Good morning. Thanks for taking the questions here. Nicole, the margin guide, I missed it, just say near in the 3.90s. Is that correct?

Nicole Van Denabeele: Yes, that is correct, Andrew.

Andrew Liesch: Got it. I guess, you had some nice improvement on funding costs there. Why wouldn’t the full quarter effect of the last 25 bps rate hikes and even one in November help push the margin a little bit higher here in the first quarter?

Aldis Birkans: Yeah. I’ll take that. This is Aldis, Andrew. That’s a good question and that’s kind of the natural tendency here in terms of thinking the, remember, the other component that we are repositioning and adding back the investment portfolio, which certainly comes on at the earning a lower yield in relation to the funding cost than a typical loan would. And so that denominator increase while we are adding numerator in terms of earning more money, the denominator increase is overcoming and then keeping kind of overall balance sheet or sorry the overall NIM in that call it 3.9s.

Andrew Liesch: Got it. Okay. That makes sense. Even so, if we do get any more rate cuts from the Fed, I mean, how do you expect the margin would react, would it be a slight benefit at first before there’s some maybe some asset catching up? I guess, how is the balance sheet positioned right now for rate changes?

Nicole Van Denabeele: Yes. So adjusting for the impact of our security sale, we model our balance sheet to be — we’re very close to asset neutral and we believe that any future interest rate movements up or down should not impact our margin.

Andrew Liesch: Got it. Okay. That’s very helpful. And let’s see the — and then, oh, just on the expense growth, did you say it was at 3% excluding Cambr for this year?

Nicole Van Denabeele: Yes. The 2025 guidance I provided for non-interest income, if you strip out the 2UniFi impact, we’re holding the core bank expense increase to 3%.

Andrew Liesch: Got you. Okay. And then I know you had the friends and family launch here recently. How is that — how did that progress? And when do you think we can start seeing some revenue fall to the bottom line here?

Timothy Laney: Yeah. Look, user testing is going well. A key focus has been on the quality of the integrations and I’m pleased to report that we encountered really only one partner issue and the team and the partner believe that that issue can be resolved by month soon. We expect to be adding additional users here by the end of this month and we’re entering Phase 3 with Apple and Android for all of our application certifications. We are still not forecasting revenue for the year. We’re in, I mean, I should suggest we expect revenue, but we’re not publicly forecasting revenue for the year, which would begin to occur in the second half of this year.

Andrew Liesch: Got it. Very helpful. Good to hear the progress. Thanks for taking the questions. I’ll step back.

Timothy Laney: Thank you. Hey, Andrew, before you go, we’re all dog lovers here. Why don’t you introduce your dog?

Andrew Liesch: Yeah, he’s joined your conference call a few times over the years.

Timothy Laney: All right. Thank you.

Andrew Liesch: Thank you.

Operator: Thank you. And I’m showing we have no further questions at this time. I will now turn the call back to Mr. Laney for his closing remarks.

Timothy Laney: Well, thank you. I wouldn’t do this, if he was actually on the line because I wouldn’t want to flatter him that much. But since he’s not, I will point out as it relates to 2UniFi, Jeff Rulis of D.A. Davidson provided what I believe was a very solid 2UniFi update that was published on January 3rd and believe it’s worth a read. So I’ll call that out. And with that, say thank you everyone for joining today. Have a good day.

Operator: 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.