Q4 2023 National Bank Holdings Corp Earnings Call
Presentation
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. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.
I will now turn the call over to Emily Goodman, 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 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 w. w. w. dot National Bank Holdings.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.
Very extremely good morning and thank you for joining us as we discuss with National Bank Holdings' Fourth Quarter and Full Year 2023 financial results. I'm joined by August Perkins, 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 CAT. one 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 all of us. On that note, I'll turn the call over to you and I will.
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 Cameron 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 of further 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 fees. Excluding this additional loan fee income. Our net interest margin was still a strong 3.83% of 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 is fully taxable equivalent net interest income to be in the 357 to 362 million range.
In terms of asset quality remains strong. Our nonaccrual loan ratio improved seven basis points to 0.37%, and our nonperforming asset ratio also improved seven basis points to 0.42%.
The fourth quarter. The fourth quarter's net charge-offs were just two basis points annualized and finished the full year also lead with just two 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-offs.
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 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 to $258 million. Most of the lengthier interest expense sorry, noninterest expense increase is driven by the continued investment into UniFi, which is projected to contribute approximately 10 million of the increase to 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 Unifi buildout, and we expect to realize a similar amount in 2024. As such, we project 2020 four'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 one 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 all this while 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, Ana, I'll ask you to open up the call for questions.
Question and Answer Session
Operator
(Operatorv Instructions) Jeff Rulis, D.A.
Yes, 13 Q. And if you would like to ask a question, please signal by pressing star 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. Once again, that is star one, if you would like to ask a question and we'll pause for just a moment.
We will now take our first question from Jeff Rulis with D.A.
Thanks.
Good morning, guys. Wanted to circle back to your sort of last comment there on capital and looping, Al, 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 number of options in 24, did that flattish, but share count, I assume that you think you'll be active on the buyback front. I just wanted to clarify with that?
No, not necessarily. Actually. It seems that we will not be active. We don't really issue them at 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 and said another way, obviously flat, flat unless we do have the opportunity to buyback at the right price.
Okay. And Tim, just on the kind of M&A, I don't know if that is it any more attractive pullback in rates? I guess some assumption deals can come together if fair values less of a headwind. But any any thoughts in your conversations about kind of M&A appetite?
I think you hit the nail on the head it's all about getting to fair value. And we were purposeful when really I'm not working the pipeline in 2023. As we closed out 23, we began to resume conversations and you would I would 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 on a 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?
Yes.
As it relates to the last two acquisitions, we remain very pleased with the Utah base rock Canyon acquisition and the Wyoming Jackson Hole based bank of Jackson Hole. I will say as it relates to the bad 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 2020 24. 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 that next step as the next step in supporting that of that particular growth.
In terms of market size, I'm really proud of our 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 the middle of the road solid player, but that's a market that's really stepped up often 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's, pretty obvious. And 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 are both.
Thanks, Kim. 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 didn't incorporate Fed moves, but just up down sideways on impact of maybe no cuts, three cut six cuts this year. Just to kind of frame up, what do you think the impact to margin in a vacuum would be yes.
Well, in a vacuum, I would say that the way we model and will be part of our K disclosure that we are rate neutral. So we've called out our all of our asset sensitivity that we are we had over the last several years in and in that theoretical model a world we would not benefit or be hurt by rate movements up or down for that matter. But the reality is we'll know we'll see how the deposit pricing moves and in terms of loan volumes come on, obviously, because the ability to grow the our earning assets is a big contributor to maintaining margin where it is today as well.
Okay.
But it gives you about zero point would just be that that three 83, is that would you point to core they're going to go into to 20?
That is correct. Three 83 is we'll be jumping off into the into 2020 for one thing, I will say that we did purposefully it ran off our investment portfolio during the second half of 2023 in order to maintain the less than CAD10 billion asset size by December 31st. I do expect to rebuild that investment portfolio by about $200 million. In addition to where we sit today, that clearly is a is a lower yielding asset that's coming on on. So that might impact that calculation of percentage calculation for margin, which is why it really geared towards the giving the net interest income as the guidance for this this year.
Perfect. I just wanted to understand on the UP that I got you.
Operator
Thank you.
We'll now take our next question from now center, Rocco with KBW.
Hey, guys, good morning and good morning. I know you're a little bit limited on what you'll disclose about Cambridge, but 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 this strong loan growth that we saw this quarter?
It has certainly been a contributor to the liquidity of Camber is for performing within expectations. We're making additional investment in Camber that will give us even more flexibility with Camber as we march through 2024 and beyond. And that will translate into not only continuing to be a source of liquidity, but actually enhancing fee income of the bank as we develop out those capabilities all this, what would you add?
I think you summarized the 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 camera. That was some our organic or organic growth in the market footprints that we are in, but then you summarized about it.
Great.
Thanks.
For that. I'm wondering if we could touch on maybe noninterest-bearing deposits. I know we've seen a lot of other banks. You're seeing some outflows as this, Tom, it's slowed down at all towards the end of the year and into January at all? Or are you seeing the pace of decline slowed down at all?
And 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 how the accounts are being utilized from the night before and the ACH calls in the morning. So on whether we call it bottom here, I don't know, but we certainly seen a significant slowdown in the flows. Al O
kay, great. And if I could just sneak one more in here on credit. Obviously, everything's looking great, and you guys have had a great year in credit. Just wondering on this 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?
Yes.
Well, as a reminder, we do stress test our portfolio twice a year with our internal team once a year with an external team of the Secca. And it helps us because it's a very granular review and it helps us proactively identify, yes, emerging issues. And so our Our position has always been we take these issues and deal with them as rapidly as possible of with the fundamental belief that problems in banking don't tend to age well. So And whereas we stress test into different recessions 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 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 been 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 the expectation that rates could go even higher. And so I I'm particularly pleased with what I'm seeing in terms of coming on new business and certainly of the aged portfolio, as you as you can determine from the credit metrics is performing quite well.
And so thank you for answering all the questions.
You bet.
Thank you, Matt, and thanks, Matt.
Operator
Once again, that is star one. If you would like to ask a question.
We'll take our next caller, who is Andrew to round one.
Stephen.
Hey, good morning.
Good morning, Tom.
Maybe just to start, Tim, on some to unify and 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 from to unify within that guidance? I mean, 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, 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 to unify 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 unified 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 stimulate a road show, we'll be going very deep on to unify. And I I can tell you we're excited to share more at the right time. And 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 Camber 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 are on the list first with credit below that. So we are just hyper focused on fraud management, protecting our clients and protecting the bank.
It's very helpful. Tim, I really appreciate all the color there from you. If I can ask maybe another on just the on 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 from 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 and I'm proud of the mortgage banking leadership team. They probably do some of the more more difficult work in times like these and that they've made a commitment to never losing money in that business. And only way you can support that commitment. He's during slow times is bring down your staff. And so they methodically brought down staffing over the course of 2023 and in fact were a positive, albeit smaller than we've seen historically, but in fact, were a positive contributor during the year. So that leads to the second part of your question, which is and they also and again, I think this is why 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 almost anything you would add to that?
I'll say in terms of my fee guidance for the 2020 for embedded in there is mortgage a benefit or mortgage income that is similar what we recognized in 2023 Com. So I'll let you kind of make judgment calls from there, whether you know how the economy evolves and what the upside potential 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 own we need to see if we need to see downward rate movement to. So I really realize that full potential.
Okay. Got it. That's really helpful. And not, as you said, in the 24 fee income guidance on a pretty stable level to this, call it $12 million or so of mortgage bankers are 23. That's where.
Perfect. Well, thank you for taking the questions.
Thanks.
So much.
Operator
We'll now take a question from Andrew Liesch with Piper Sandler.
Hey, good morning, everyone. Good morning to all of this on these on the rebuild of the securities book what 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 combination of.
I mean, I think we are sitting a little too much cash on still from March of last year, a type of a perspective so it does not need to be as much cash on day to day. So we'll probably to 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 knows on that 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 as a store of liquidity for us. And therefore, maintaining short duration and highly liquid asset is what we do and probably how we manage liquidity and model liquidity is just implies that we need call it another 200 million for the rest of this year in growth in this book too, to maintain our liquidity threshold.
Got it.
That's helpful. And then is there any detail you can provide on the reserve that you set aside to that nonaccrual loan, I guess how long it's been and you've identified it and what drove the increased provision this quarter as far as like just some monitoring collateral or any big new business?
Yes.
Maybe I'll I'll start at a high level on and I'll reference of 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 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 that to be resolved in the first half of this year on strong collateral of strong operating potential and on 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 Yes, I'll just say of the provision expense of 4.6 million embedded in that was approximately 2.5 million of specific reserves related to this credit and calm come come time that credit is being worked out and that certainly would become a charge-off. But our ACL to total loans accordingly would drop by one percentage point to four basis points to. So we would be feel adequately retailers we are fully reserved for at the ACL to total loans is little inflated because of that additional specific reserves.
Got it. But still seems like a decent portion of the allowance quarter was also for for growth. Is that right?
Absolutely.
Liability, US GAAP, nothing that you're at. Nothing off that you're seeing in the portfolio.
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 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.
Okay.
That's really helpful. Thanks for taking the questions here.
I'll step back.
All right. Thank you much.
Operator
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. And just sort of quickly, we'll say thanks, everyone, for joining today and for your interest in National Bank Holdings.
Have a good day.
Operator
This concludes today's conference call. And 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. Thank you very much and have a great day. You may now disconnect.
