National Bank Holdings Corp (NBHC) 2022 Q3 法說會逐字稿

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2022 Third Quarter Earnings Call. My name is Keith, and I'll be your conference operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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 and 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 to National Bank Holdings Corporation's Chairman, President and CEO, Mr. Tim Laney. Please go ahead.

Thanks, Keith. Good morning, and thank you for joining us as we discuss National Bank Holdings' Third Quarter 2022 financial results. I'm joined by Aldis Birkans, our Chief Financial Officer. We're pleased to deliver quarterly core earnings of $0.80 per share. We recorded organic loan growth of 30.2% and increased average total deposits 10.3% annualized. It's noteworthy that to date, we have experienced a nominal increase in the cost of deposits. It's also important to point out that all asset quality metrics remain strong and that we have prudently increased the conservativeness of our underwriting standards in light of questions around the economy. On that note, I'll turn the call over to our CFO, Aldis Birkans. Aldis?

All right. Thanks, Tim, and good morning. We delivered another strong quarter of financial performance while also completing the acquisition of Rock Canyon Bank. Just to bring you up to date, so far in October, we also have closed on the Bank of Jackson Hole acquisition and successfully completed the Rock Canyon Bank system integration. The integration of Bank of Jackson Hole Systems is scheduled for later this quarter and will allow us to enter the next year well positioned to build on the opportunities each bank presents.

Overall, our strong results during the quarter were driven by exceptional loan growth, expanding net interest margin and as always, the carefully managed expenses. For the third quarter of 2022, we reported net earnings of $15.8 million or $0.50 per diluted share. During the quarter, we realized approximately $7 million of transaction-related expenses as well as increased our loan loss provision expense by $5.4 million as part of the day 1 CECL reserve for the Rock Canyon loan portfolio. Excluding these transaction-related items, our adjusted core net income was $25.3 million or $0.80 per diluted share, which is a 16% increase over the prior quarter's adjusted results.

Our pretax pre-provision net revenue, excluding the transaction expenses, grew $11.3 million or 38% on a linked-quarter basis. And as a reminder, this quarter included only one month of Rock Canyon Bank's financial performance. We are capitalizing on the economic resilience of our markets and continue to gain market share across our geographies. During the quarter, we funded $631.6 million in loan originations, which was another quarterly record. The total loan portfolio grew $905 million during the third quarter. And after adjusting out the Rock Canyon Bank loan book addition of $538 million, our loan portfolio grew a strong 30.2% annualized.

Net interest margin expanded 63 basis points and fully taxable net interest income increased $13.1 million or 90.9% annualized on a linked quarter basis. And while average earning assets grew $180 million or 10.5% annualized during the quarter, the main driver for the net interest income growth was the loan portfolio repricing.

The total average rate for loans held for investment increased from 4.4% in the second quarter to 5.0% in Q3. We were successful in managing deposit betas during the quarter and the total cost of deposits increased just 2 basis points.

Looking ahead for the fourth quarter 2022. At this time, we project NBH's net interest margin to remain at around 4%. In terms of our asset quality, it remains strong with decreases in both the classified and criticized loan ratios. The third quarter's net charge-offs were just 1 basis point annualized and both the nonperforming asset ratio and the NPL ratio remained low. During the quarter, we recorded a provision expense of $12.7 million.

And as I already mentioned earlier, $5.4 million was driven by the establishment of day 1 allowance for credit losses for the Rock Canyon Bank loan portfolio. Approximately $3.9 million of the provision expense was to support the strong organic loan growth and the remainder was CECL model driven increase. That reflects the increased economic uncertainty as indicated by the Moody's forecast scenarios. As a result, our ACL ratio to total loans ended the quarter at 1.15%.

Total third quarter's noninterest income was $17.4 million or a $600,000 increase from the second quarter. The continued slowdown of our mortgage business was more than offset by record quarterly bank card revenues and strong core banking service charge income, as well as a nice unrealized gains from our equity method investments.

Looking ahead, for the fourth quarter 2022, we are projecting our total fee income to be in the $15 million to $17 million range. Noninterest expense totaled $53.9 million and included approximately $7 million of acquisition-related costs. On a year-to-date basis, we have realized approximately $8.3 million of acquisition-related expenses. And at this time, we are projecting to come in well below our total modeled transaction costs for both transactions.

Our noninterest expense run rate remains well controlled. Excluding these acquisition-related expenses, the third quarter's core banking expense was $47 million compared to $44.5 million of core expense in the second quarter. The linked quarter increase was primarily driven by the addition of 1 month of Rock Canyon's expenses.

For the fourth quarter of 2022, we are projecting noninterest expense to be in the range of $64 million to $66 million. Included in this projection is an estimated $5 million to $6 million of transaction-related expenses yet to be realized as well as a full quarter of expense run rate from both acquisition. Most of the cost saving efficiencies from the 2 bank acquisitions are being realized gradually and will continue through the fourth quarter and into 2023. As such, I will provide more guidance with the full year 2023 projections on January's earnings call.

Our capital ratios remained strong at 12.8% common equity Tier 1 ratio and 9.6% tangible common equity ratio. Our tangible book value per share was $22.40 as of September 30, and it reflects the full impact of the Rock Canyon Bank acquisition.

We closed the Bank of Jackson Hole acquisition on October 1, and the purchase accounting impact of this transaction will be reflected in the Q4 results. Our effective tax rate for the quarter was 20.1%, an increase driven by the higher-than-projected pretax income through September 30. For the fourth quarter, we project the tax rate to return to 18% to 19% range. We ended the quarter with 33.2 million shares outstanding. And after incorporating the share issuance for the Bank of Jackson Hole acquisition, we project the fourth quarter's average diluted shares to be around 38 million shares outstanding. Tim, with that, I'll turn it back to you.

Thanks, Aldis. We cannot be more pleased with our recent acquisitions of Rock Canyon Bank and the Bank of Jackson Hole. Both banks operate in very attractive markets and each deliver strategically important services that we intend to sell across the remainder of our enterprise. Again, I couldn't be more pleased with these 2 acquisitions and the caliber of our new teammates. I believe these 2 acquisitions have the potential to meaningfully exceed our initial earnings expectations. And on that note, Keith, let's open up the line for questions.

(Operator Instructions) We'll take our first question from Jeff Rulis with D.A. Davidson.

Tim mentioned rather nominal increase in deposit costs. Could you share with us again what your beta assumptions for the cycle on deposit betas are?

Yes. Well, let me start by saying that we could not be more pleased with how we position the balance sheet through the cycle and through all the excess liquidity to be gathered through the post-pandemic environment. As you recall, we maintained most of it in cash, which allowed us not only to gather huge margin expansion here and be prudent on deposit betas, but certainly has helped AOCI impact as well.

So looking into the -- I had, we will not and we have not been price leaders on the rate. So if you look at our -- and we've talked about it before, we're relationship type of bank, we strive for primary transaction accounts. And we've been able to date manage our betas quite nicely how it's going to go from here. Certainly, we will have to respond to markets as markets adjust, however, we are not going to be the price leader.

Okay. So should we expect a similar, I guess, prior cycle beta again this time around? Or do you think you're better positioned to potentially improve upon that?

Well, I think on the interest-bearing deposits, it would probably be similar. If you look at our balance sheet composition, prior cycle, we had smaller DDA to total balance or noninterest-bearing deposits to total balance of mix. So overall beta should be little bit better if you look at the 40% noninterest-bearing deposit mix that we have today. Again, going back to the relationship-based model. So overall, I think it might be slightly better, but no reason to think that we would be -- once the cycle is over be any different than before.

Okay. And I guess, leading to the margin discussion of around 4%. Could you -- I guess that surprises me that it just sort of is going to flatten out here given the pace of the earning asset increase. I guess does that number include accretion, the 4%? And then I guess, does that assume you see a pretty rapid increase in the funding or the liability costs linked quarter?

Yes. You kind of pointed out a few. There's multiple items at least for our balance sheet to take place in the fourth quarter that makes it tricky to forecast where the margin will be. Certainly, we have Bank of Jackson Hole coming on, that balance sheet. Rock Canyon Bank had 1 month now, will the full quarter balance sheet impact the purchase accounting marked accretion impact. Certainly, it doesn't seem like the Fed has done yet and looking at another rate hike next week, that impact and then certainly to your original question on beta, some what deposit costs do. So at this point, the best -- incorporating all of that, it does feel like it's going to be 4%. But again, there's just so many moving pieces that I don't want to -- we'll be providing more guidance in 2023 for the full year for next year.

Okay. And Tim, I wanted to check in with you on -- I know that sounds like some more guidance for '23 is coming. But just big picture, think about 23% organic growth. Early in the pandemic, your bank was pretty cautious, unique times, but lending was, I guess, smaller than historical. I guess, how do you see the upcoming environment given from your seat, just economic outlook and where you think big picture organic growth on a net basis is in '23?

Jeff, great question. It begins with a bias toward more conservative underwriting in any case where we're using our balance sheet. We've actually -- while we certainly hope this doesn't come to fruition in the marketplace, we've now moved to underwriting debt serviceability on a global cash flow basis for any borrowing client using a double-digit interest rate scenarios. Again, we hope that, that doesn't come to fruition, but we're not banking on hope. We're prepared to understand that our clients could cover debt at those kind of rates, if need be.

Pipeline for the fourth quarter in our core commercial in small business arenas are as solid as ever and as we've said before, benefit from operating in very healthy and strong markets. I could not be more pleased with what I've seen in the early days of bringing Rock Canyon and Bank of Jackson Hole on board to include some pretty interesting dynamics around gathering additional low-cost deposits in the market. So I genuinely feel very good about the strength of our capital position as we face uncertain times with the economy. I feel very good about the markets we're operating in.

I feel like in so many respects, the teams are operating at or near a point of running on all cylinders. And while my teammates have certainly worked very hard to bring these 2 acquisitions to close in such a short time frame, no one has taken their eye off the ball in terms of taking care of clients and profitably growing the business. So what you should be hearing there, Jeff, is quite a bit of optimism despite the uncertainty. I think I've mentioned in my talking points that I'm already and I have to use the word believe, but I believe that we are really well positioned to realize stronger returns from these 2 acquisitions than we had modeled in any of our acquisition scenarios.

So keep in mind that we now have a trust business that we are confident we can leverage across our entire enterprise that's coming out of the Bank of Jackson Hole. If you're not familiar with Wyoming trust law, everyone on this call should have their trust based in Wyoming and Bank of Jackson Hole stands ready to help you accomplish those goals.

And then secondarily, we are absolutely impressed with the processes in place for providing SBA loans to small- and medium-sized businesses that's been brought to us by Rock Canyon Bank. It's noteworthy that they remain the #1 bank in the State of Utah, talking about punching above your weight, #1 state in the bank of Utah for production of SBA lending. So if you don't detect a little bit of optimism in what you're hearing from me, Jeff, you're not listening.

Fair enough. Love the trust plug. I'll step back.

We'll take our next question from Kelly Motta with KBW.

Congrats on closing both deals relatively recently.

Thank you, Kelly.

I wanted to circle back to loan growth because on an organic basis, it was incredibly strong. Tim, I'm wondering if you could provide any color on the granularity of that what you added? I know your loan book tends to be on the more granular side, but I'm wondering if there is anything chunky or unusual in that composition because that was just so strong?

No. I mean, back to my reference to firing on all cylinders. We've seen solid production really across all of our specialty teams when I say that teams focused on particular industries. Our geographies have been strong. And I do want to emphasize that this is all relationship-oriented business, and our bankers are rewarded for capturing the full relationship or earning the full relationship with these clients. So you can also expect to see or I certainly expect to see a nice growth in our treasury management services and obviously, capturing those transaction deposit accounts are important to us in terms of keeping cost of deposits down.

But I will tell you that it remains pretty granular. And we're making inroads in a lot of these markets that we've invested time in bringing relationships over from other institutions for a number of different reasons. I will say, Kelly, that getting back into the office and beginning to get out in front of clients as early as Labor Day of 2020 seems to really be paying dividends. At the end of the day, when you're working to earn a new relationship, it's not just true for banking, but I think for any important relationship, you've got to be willing to get face-to-face, you've got to be willing to put in the time together to strategize what makes sense. And I'm proud of my bankers because they've been doing that since Labor Day of 2020.

Got it. That's super helpful. Maybe in terms of the size of the balance sheet, I know there's a lot going on with -- we still have a full quarter impact of the first deal and the second one just closed on October 1. But it looks like you saw plenty of balance sheet flexibility.

I'm wondering about kind of how we should be thinking about funding loan growth going forward? Any color, maybe just on cash flows off of the securities bulk and just kind of managing the size of the balance sheet to support what has clearly been a really strong production engine that you have there?

Sure, sure. Certainly, first and foremost, would love to finance any loan funding with the core deposit growth, and that will be and continues to be our primary focus that I mentioned, we're not necessarily going to pay up for deposits. But it is, as Tim mentioned, on a combined relationship scorecard for our bankers, and they get paid on bringing both sides of the balance sheet together. So deposits number one. In terms of investment portfolio, that continues. As you know, we historically have built it with a cash flow in mind. So that cash flow is about $18 million, $20 million a month that is projected for the next 12 months or so. So that's a nice source if need to be funding additional loan growth as well. And then we certainly have still a little bit more excess liquidity left from -- as we didn't deploy that. So those are kind of the 3 main sources in the near term.

Got it.

It still sits at 84% loan deposit ratio. I think historically, we've be bumped up to 95%. I think that's probably where we feel comfortable to go to when we build out, fully leverage the balance sheet. So certainly, don't look to reach the 100% loan deposit ratio, but we still have some room to move there too.

Got it. Maybe last question from me has to do with asset sensitivity. I really appreciate the guidance around the margin for 4Q. There is some -- the full quarter impact of both deals coming through on that. Just thinking kind of on a go-forward basis, based on kind of your setup, I would assume you'd still be asset sensitive and maybe if the deal is keeping you more steady next quarter. But just wondering kind of from a high level is what we should be thinking about more neutral to the rising rates going forward? Or any help on that would be great.

Sure. Now we continue to be asset sensitive, not as much as we were a quarter or 2 ago. So some of the asset sensitivities come out as the cash, which is a big chunk of the asset sensitivity was sitting in cash, right? So to the extent that cash has been invested in a fixed rate loan that's been taken off the table, locked in at very good yields now. So -- but we still -- both between the 2 banks, I'd say, Rock Canyon was more asset sensitive given the nature of their business at SBA. Bank Jackson Hole, little less asset sensitive than us. So on a net-net basis, I think they kind of complement us where we were. But on a go-forward basis from hereon, we probably are, I'd say, half, if not little less asset sensitive as we were, say, 2 quarters ago.

We'll take our next question from Andrew Terrell with Stephens Inc.

I don't want to beat a dead horse, but maybe just to start on the margin. Aldis, do you have what the margin was, the NIM in the month of September?

It was slightly above 4%.

Okay. And then can you just remind us of the Bank of Jackson hole, how accretive or dilutive that was to the margin just pro forma?

So Bank of Jackson Hole didn't come on the books until October 1, so it was neither, it was not. The Rock Canyon Bank added in the net interest income line approximately $3 million to maybe $3.5 million.

Understood. Okay. So maybe, I guess, I'll just shift gears over to capital. I guess, with both acquisitions kind of out of the way at this point, capital is still in a pretty solid position. Tim, can you maybe just update us on how you're thinking about your capital positioning from here? And then can you remind us if there's any buyback in place and whether or not you have any appetite there moving forward?

We will certainly maintain optionality around buying in shares. We happen to believe that we're going to be generating very strong earnings that would support a meaningful move in stock price in '23. And should the market move against us, and we have an opportunity to buy, we'll pursue that. But we also remain focused on some other, I'll describe them as very strategic partnerships or acquisitions, and we are just as focused on our work around 2UniFi.

And while I haven't mentioned it today, again, I couldn't be more pleased with the progress the team is making on that front. So I guess it might be helpful to talk about we're not as inclined to do, and we've become, I think, very black and white on this point. We are not going to be the acquirer of, call it, less than $1 billion banks that are not operating in growth markets. We will not fall trap to simply acquiring banks because we can acquire them at a good price and realize some accretion of earnings over a couple of years as a result of expense savings.

Any bank acquisitions will be strategic, will be in growth markets, will fit our culture and our approach to underwriting credit. And outside of that, we'll be focused on other specialty businesses that would benefit both the core bank and 2UniFi. So I know, Andrew, that's probably a little more than you were looking for, but that's about as much detail as that's provided in a while.

No, that was great color. I really appreciate it, Tim. Okay. And then if I can ask just one more. On the loan growth this quarter, did you see any improvement in line utilization? Did that play much of a role in a strong level of growth? And then remind us where this utilization sits overall, how that compares to kind of pre-pandemic and then your outlook for commercial line utilization?

Yes. So on Page 10, on the long table, you can see in the footnote that details last 5 quarters of line draws that we see. And you can see it was a bit elevated this quarter, were higher than historically, but I'll say that we booked just as many commitments. So the line utilization itself, the way we measure for commercial, all of our commercial lines is sitting at 62% and that's been right where we historically been on average.

Okay. I appreciate it. Congrats on the quarter. I'll step back.

Yes. Thank you.

We'll take our next question from Andrew Leisch with Piper Sandler.

I think a quarter ago, you mentioned there'd be a couple of million dollars per quarter of 2UniFi expenses in the third and fourth quarter. Did that -- were those fully realized here in the third quarter?

Third quarter, it was about $1 million of 2UniFi related, $1.1 million 2UniFi related expenses embedded in my guidance is a continuation of that and slight growth. And then as we entered the 2023, I'll be more detailed on that projection in January's earnings call.

Got it. And then on the fee income guide, does that include both acquisitions at $15 million to $17 million?

In terms of guidance, it does that. So in terms of -- so certainly be seeing the mortgage continues to slow down, so it reflects that. In the third quarter, we had the unrealized gain, a pickup in equity method investments. So not counting or not necessarily repeating, and that's why we kind of see a little bit of a step down there, but it does include both banks.

We'll take our next question from Jeff Rulis with D.A. Davidson.

Just a couple of follow-ups. I don't know if you've referenced this, I just wanted to confirm the thought of as you close the year-end, it certainly looks like you'd stay below $10 billion. Is that fair to assume?

Well, on a pro forma basis, as we identified in the earnings release on day 1, we were $9.4 billion asset-sized bank, (inaudible) implied, we continue to grow at $600 million, which I at this point say that we will stay below 10%, plus (inaudible) optionality and flexibility, I think, back to being why we are so cautious and prudent on deposit betas that allows us to make sure that we make all that I call...

And I'll just remind everyone around the timing of crossing over the $10 billion threshold in terms of impact on any fee income.

Yes. So really, when we do cross and again, it doesn't seem likely at the end of this year. So it's really 15 months out. But in today's run rate basis, it'd be impacting us about $8 million to $9 million interchange income from Durbin, which is certainly like 2% of our total revenues. So a very manageable amount.

Yes. I think the real point is that you're talking a bit on the impact that would be 15 months out. In terms of regulatory standings or standards around our core bank processes, that investment was made years ago. So we're in a good -- very good place with our regulators on that front in terms of infrastructure and position of the bank. And we do benefit from the fact that we're not a heavily consumer-focused institution, hence the smaller impact on the piece that Aldis mentioned.

And just to clarify a couple of the guides. All this $64 million to $66 million on expense, again, that includes further merger expense, so kind of the core is closer to $60 million all in?

Of course, close to $60 million, so to build it up. You got it. So first of all, yes, it does include the transaction expenses that we still yet to incur here in the fourth quarter. If you take those out, the core is closer to $60 million. And to build that up just for clarity. As we know, NBH, we have been running on a stand-alone basis about $45 million quarterly run rate, higher in the quarters when we had higher mortgage commissions lower and now that it's gone -- that component is gone down somewhat offset by the 2UniFi component.

So call it $45 million, which implies about call it, $15-ish or so million between the 2 banks. They have been running prepurchase or pre-acquisitions. They've been running $16 million to maybe even $17 million trend. So we are already incorporating about 10% to 20% cost saves here in the fourth quarter. And certainly, that's not done yet -- there yet. I hope that helps.

Okay. Yes. No, it's more than I bargained for. I appreciate it. And then just also on the margin guidance. I can't remember -- Aldis, do you -- are you including the assumption of Fed hikes still kind of consensus view still come year-to-date in that fourth quarter guide margin?

Yes, it's all inclusive, let's put it this way because, I mean, again, the -- just for clarity perspective, for example, for the deposit side and if we were to combine both Rock Canyon and Bank of Jackson Hole cost of deposits, which came on between 40 to 50 basis points to our 18, certainly, that will have an impact in itself too just in terms of forecasting and projecting for fourth quarter. Deposit betas will look like they went up, but it's just incorporating their current cost of funds without us moving into deposits. So my attempt here was to incorporate all of that in that 4% guidance, including the -- whatever the actions may be coming.

And Jeff, just on that last point around Rock Canyon Bank and the Bank of Jackson Hole, just as I've talked about, certain capabilities, we expect to scale from those banks into the rest of our enterprise. We see a really nice opportunity for low-cost deposit gathering as we drive our treasury management capabilities and the focus on capturing full relationship into those markets with those banks. So my full expectation is that we will see the cost of deposits in those markets actually come down on a relative basis from where they had operated historically.

Thank you. 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.

Well, I'll just simply say, thank you. I do want to thank all of my teammates again for just delivering what I view as brilliant results and more to come, folks. We're excited about our future. Have a good day.

And this concludes today's conference call. The earnings release and an online replay link of this call will be available on the company's website on the Investor Relations page. Thank you very much, and have a great day. You may now disconnect.