National Bank Holdings Corp Q4 FY2021 Earnings Call

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2021 Fourth Quarter Earnings Call. My name is April and I will be your conference operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session following the prepared remarks. As a reminder, this call is being recorded for replay purposes. I would now like to remind you that this conference call will contain forward-looking statements, including but not limited to the statements regarding the company's strategy, loans, deposits, capital, net interest income, non-interest income, margins, allowance, taxes, and non-interest expenses. 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 provide 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 at 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. Please go ahead.

Thank you, April. Good morning, and thanks for joining National Bank Holdings fourth quarter and full year 2021 earnings Call. I'm joined by our Chief Financial Officer Aldis Birkans. We finished 2021 with record earnings and strong momentum as we enter the new year. Our team is delivering record levels of loan growth, record levels of low-cost deposits, and pristine credit quality. We benefit from operating in very attractive markets, and our focus is on earning the full banking relationship of our clients. We continue to realize tremendous opportunity to grow our base of small and medium-sized business relationships and we have a pipeline that continues to expand at an impressive rate. We're well-positioned to benefit from rising rates, and I'm pleased to share that outside of our investments in 2UniFi we believe we can hold core expenses flat at 2021 levels. On that note, I'll turn the call over to Aldis for more detail on our fourth quarter financial performance and 2022 expectations. Aldis?

Thank you, Tim. And good morning, everyone. As always, during my comments I will cover the financial highlights for both the fourth quarter and the full year, as well as share our guidance for 2022. Consistent with our past practice our guidance does not include any future interest-rate policy changes by the Fed, nor does it include any large yield curve changes in general. As we reported in last night's release, we had an excellent fourth quarter as we delivered net income of $22.8 million or $0.74 of earnings per diluted share. For the full year 2021, we had reported a record net income of $93.6 million or $3.01 per diluted share. And although we carried an average excess cash balance of approximately $750 million throughout the year, the full year's return on tangible assets was 1.37%. And despite the higher levels of excess capital the return on tangible common equity was 12.87%. As Tim already discussed, we are very pleased with the strong loan growth during the second half of 2021 and the continued performance of our teammates in building robust new client relationships. During the fourth quarter, our non-PPP loan balances grew a strong 13.4% on an annualized basis. The fourth quarters loan fundings were $475.4 million, which was our second consecutive quarter of record loan production. The loan growth was broad-based with most asset classes and geographies contributing to the loan balances. And just as important, we entered the new year with strong prospects for continued loan growth. We expect to sustain this current momentum and deliver 10% to 12% loan growth for the full year 2022. With regard to PPP loans, we ended the year with $21.7 million in outstanding balances and approximately $600,000 in unrealized PPP fees. We expect most of this to clear our balance sheet during the first part of 2022. Turning to deposits. During the fourth quarter, our total average transaction deposits grew 6.1% annualized as compared to the prior quarter. And core transaction deposits grew 14.2% as compared to the average balances during the fourth quarter of 2020. Total cost of deposits decreased another 3 basis points to 18 basis points this quarter. And we projected cost of deposits to settle at 17 basis point to 18 basis point level for 2022. Again this projection does not include any interest rate increases. The fourth quarter's fully taxable equivalent net interest margin was 3.03%, an increase of 10 basis points from the prior quarter. This quarter's net interest income benefited from $1.8 million in PPP and an $800,000 of accelerated mark accretion from our acquired loan portfolio. Looking ahead, our balance sheet is well positioned to profit nicely from any interest rate increases by the Fed. Our balance sheet is asset sensitive. And our annualized net interest income is expected to grow 5.4% in a 100 basis point rate increase scenario. Our asset quality remained strong with another quarter of solid reductions in non-performing loans and just 2 basis points of annualized net charge-offs. For the full year 2021, our net charge-offs were just 3 basis points. And during the year, we reduced NPLs and NPAs 47% and 20%, respectively. The fourth quarter's provision expense of just $132,000 was a result of the reserve requirements for our loan growth being partially offset by our strong asset quality and an improved economic outlook in the Moody's forecast in our CECL model. As a result, our year-end ACL to total loans excluding PPP was 1.11%. Total non-interest income for the fourth quarter was $22 million or a $5.3 million decrease from the prior quarter. As expected, residential banking revenues decreased $6.2 million driven by a seasonal slowdown during the fourth quarter. We do continue to see strong purchase market activity in our geographies and expect that to carry into the New Year. During the quarter we also realized a $1 million gain from the continued disposition of our consolidated banking center buildings, as well as a $2 million pickup in our equity-method investment funds. For 2022 we project our total non-interest income to be in the range of $92 million to $98 million. Our core banking fees are projected to continue to grow in the low single digits. However, we do expect a slight mortgage margin compression given the recent increase in the mortgage rates. Mortgage volume projections are in line with Mortgage Bankers Association outlook. Total non-interest expense this quarter was $44.5 million, a decrease of $6.8 million from the prior quarter. The decrease was driven by lower mortgage-related compensation and a $700,000 gain realized through OREO property resolutions. Also as a reminder, during the third quarter of 2021 we incurred $2.4 million in transaction expenses related to Finstro and Figure investment. This was part of our 2UniFi initiative. Looking ahead for 2022, we project approximately $4 million to $5 million in expenses related to the 2UniFi ecosystem build out. This investment, the total non-interest expense is projected to be in the range of $189 million to $193 million. As Tim already covered, have sent our investment in 2UniFi and despite the inflationary pressures our core expenses are expected to remain flat to the prior year. When projecting the 2022 effective tax rate, we expect it to remain around 19% as always this projected rate excludes the FTE adjustment on interest income. In terms of capital management, during the quarter we had purchased another $17 million of NBHC stock, and as a result, the fully diluted share count for 2022 is projected to decrease to around 30.5 million shares. Our capital ratios remained strong at a 10.39% Tier 1 leverage ratio and a 14.26% common equity Tier 1 ratio. And finally, even with our stock buyback activity, our tangible book value per share increased $0.13 this quarter to $24.33.

Thank you, Aldis. I also want to thank my teammates across our company for their focus on caring for our clients and for their focus on taking care of each other. The thoughtful actions of my teammates are making our company stronger and producing record results. In 2022, we expect our core banking enterprise to continue to grow earnings, both organically and through disciplined acquisitions. We've also challenged ourselves to further diversify and grow our core bank earning stream with an expectation that we will begin delivering incremental results later this year. Now turning to 2UniFi. Our vision is to create a national platform that's equivalent to an Amazon marketplace for financial services. We're focused on providing small and medium-sized businesses or SMBs with alternative digital access to a robust array of financial services. These services will address borrowings, depository, and cash management needs while also providing world-class information management and access to blockchain payment tools. We believe we're positioning 2UniFi to provide SMBs with unparalleled digital access to financial services, real-time information, and blockchain solutions that in turn will reduce stress and save business owners and operators precious time and money. Earlier this week, it was announced that NBH completed a first of its kind transaction over the provenance blockchain. We believe that this work in partnership with a consortium of other banks will begin to usher in a range of lower-cost payment and information management solutions that can be game-changers for many small and medium-sized businesses. And this is just one example of how we believe 2UniFi will provide groundbreaking financial and information management solutions for business. I really do want to thank you for your interest in our company and we look forward to your questions this morning.

Thank you. And we'll first hear from Jeff Rulis of D.A. Davidson.

Good morning. Hello. Tim, just a question on the Finstro figure impact. Aldis outlined the build-out cost. Don't know if it's too early to say what the revenue impact could be on '22 and/or '23 if you've framed up anything initially?

We've not framed anything up that we're prepared to share publicly at this point. But I am very optimistic about the pace at which we're seeing, in particular, at this point the Finstro partnership evolve. And I would certainly put it in the category of examples that we're very focused on, when we talk about delivering incremental results and those are incremental to anything that Aldis has shared with everyone this morning. We're also looking at some really interesting SBA related market opportunities. And then frankly, as a result of this work around 2UniFi, we're beginning to recognize use cases related to available technology that we believe can both reduce core expense and deliver incremental revenues. So more to come. Now we're not ready to put explicit numbers around those expectations, but it is an intense focus and something we're quite optimistic about.

Got it. Appreciate it. I want to move on to another topic. Aldis, in the release you talked about cash deployment into loans. When you look at the cash on the balance sheet quarter-over-quarter, do you still have a significant balance? Should we interpret that to mean that the cash build would have been greater if you hadn't put it into loans? And secondly, could you remind us what the impact on the margin would be if you were to return to normal cash levels? Thanks.

Right. So taking the first question first. Really if you look at the margin table, you can see that, actually, on average basis we deploy about $100 million into loans on the cash, so the year-end balance sheet clearly benefits from some late cash movements and deposit movements. So that's one. In terms of how much that excess cash today is weighing on the margin calculation itself? It's about 30 basis points.

And that would return. I mean, is there what's the comfortable cash balance that you?

Yeah. We typically run our cash balance in terms of free available cash between $25 million and $50 million at the Fed. You add in kind of the cash letters and wallet money and ATM money, it's about $100 million, $125 million on the balance sheet as we can see on the top of the house. It's what our cash typically would be.

Okay. And then last one, if I could. Regarding the rotation you saw from nonperforming to other real estate owned, could that be attributed to just one credit or was there any shift within the total nonperforming assets, which remains relatively flat? Any details on that?

Yes, that's correct. It's a single loan related to an SBA program that is transitioning from non-performing loans to Other Real Estate Owned, with SBA coverage in place. The loan has an extremely low loan-to-value ratio, and we do not anticipate any loss. As we've seen in many instances, including this past quarter, these loans typically move through OREO and often lead to recoveries. So, this is simply one loan undergoing this process.

Got it. Okay. Thank you. I'll step back.

Thank you, Jeff.

And next we'll hear from Andrew Liesch of Piper Sandler.

Andrew, good morning.

Good morning, guys. Good morning. A question on the NII guide, on the 100 basis point rate up scenario. Clearly a nice benefit there. But you guys are also in growth mode and are doing some interesting things in the fintech front. So my question is that, how much of that boost do you think falls to the bottom line or maybe accelerates other investments in the franchise?

Well, I think in terms of how I guided for this year, all of that falls to the bottom line, because the investment in 2UniFi, what we've circled up and as part of the expense guidance already is $4 million to $5 million. So unless there is accelerated investment or change of strategy and additional things, we can see we can develop. Right now, all of that would be accretive to us.

And Andrew it’s such an important question, and I think it offers us the opportunity to clarify. We're going to manage with great discipline the pace of our investment in 2UniFi and should we find a need to accelerate investment, we will find opportunities in the company to bring down expense in other areas. And I just want to be very black and white about that. We'll continue to look at, for example, our brick and mortar distribution network for opportunities to create greater efficiencies. So we feel like our estimates around investing in 2UniFi are very tight. But again, our commitment is, should we for some reason discover the need to accelerate our pace of investment. Our discipline will be around offsetting that investment through action on other opportunities.

Got it. That's really helpful. At this level with the stock, what is the interest in increasing repurchase activity?

I'm pointing Aldis and he's pointing at me. I think what we would say is, I'll continue to be opportunistic and we have a threshold and discipline around, in our mind, the pace at which it would take to earn back any tangible book dilution. We've adhered to that, obviously, we've benefited from that discipline, and we'll just have to watch what happens in the market, because we obviously are very optimistic about where this company can continue to go with its earnings. And I guess I'll leave it at that, that's a non-answer answer. Sorry, Andrew.

That's still helpful. All right. I will step back. Thanks for taking the question.

You bet.

And next we'll hear from Kelly Motta of KBW.

Good morning, Kelly.

Hi Tim and Aldis. Good morning. I wanted to discuss loan growth. It's wonderful to hear about the UniFi projects, and you've also demonstrated impressive growth this quarter. Tim, in your prepared remarks, you mentioned that this growth is quite broad-based and spans various geographies. Could you provide more insight into how much of this growth comes from acquiring new business, economic expansion in your markets, or normalizing line draws? Any additional information on this and the outlook for the future would be appreciated.

Great question. You've highlighted all the key areas at year-end. We're excited about the progress our teams are making in capturing market share. In certain segments of the small and medium-sized business sector, these businesses are not receiving the attention from larger institutions that they once did, which creates opportunities for firms like ours that specifically focus on this market. I am very pleased with the discipline our teams are demonstrating. Since we returned to our offices in July and by Labor Day of 2020, we've been engaging with clients in a careful and sensitive manner. Many of the prospects who are now clients or are in the pipeline to become clients are ones we've met face-to-face. When businesses are making critical decisions about their banking relationships, we've found that direct engagement is crucial for managing that transition and showcasing our understanding of their needs. I couldn't be happier with our team's dedication to gaining market share. Additionally, we have strategically positioned ourselves in some of the best markets in the United States, which are outperforming national averages by various economic metrics. This gives us a favorable advantage, and it was intentional. We will continue to work diligently to expand in these markets as they grow and show potential. Moreover, both Aldis and I mentioned that this strategy sets us up with strong momentum as we move into 2022. We are very encouraged and pleased with the momentum we are experiencing as we enter this year.

Great. And maybe if I could slip in a last one. You also mentioned potential M&A in your prepared remarks, I believe on the traditional side. Just wondering what the appetite is there and kind of how the pace of conversations have been?

Yeah. So we're constantly in a state of working to develop relationships with groups that we think would be powerful partners. And we're going to maintain our discipline around ensuring that anything we might do on that front would be well met by all of our investors. We hold ourselves to a high standard there. Our fundamental belief is that should any company consider selling themselves to us and becoming part of our company, that is investors, it's in their best interest to construct a transaction that's going to be well received in the marketplace. And we're not going to do anything unless we believe cultures mesh well and unless we believe that there are incremental opportunities to create revenue. What I can tell you is it is important that we've made a very clear decision that what we're not going to do is play in that space where you're simply making an acquisition and only looking for expense take out. If a target doesn't bring incremental capability or incremental opportunity to the table it's not something we will focus on. Kelly has stopped. I'm not sure if you have any other questions. But that's where I would leave it.

And she may have dropped. We'll move on to Brett Rabatin of Hovde Group.

Hello.

I joined a few minutes late, so you may have covered some of this, but I wanted to first discuss your assumptions regarding deposits. Like many others, your deposits increased about a third during or after the pandemic. I'm curious about your outlook on the deposit base. How much of it do you consider stable, and how do you anticipate liquidity might decrease for customers as you consider the future economy?

Great question. I'll start and then let Aldis provide more details. We've discussed this in previous calls. I believe that there could be a tendency towards complacency concerning the excess deposit balances the industry has seen. We address this by being accountable in developing new relationships. While the temporary increase in balances is noticeable, what excites us is the growth of new relationships, which aligns with our strategy of capturing market share in expanding markets. Now, returning to your question, I'll pass it to Aldis.

We did not provide specific guidance on deposit growth since we are focused on developing our relationships and client base. However, over the past year, transaction deposits grew by 14% from the fourth quarter of last year to the fourth quarter of this year. I believe this growth rate will most likely decelerate to mid-single digits. That said, it is difficult to make a precise estimate due to the unpredictable effects of liquidity withdrawals by the Fed and potential quantitative tightening.

Okay. Fair enough. And then again, you may have covered this, but line utilization, I'm curious how that trended during the fourth quarter and kind of how you see that playing out over the next few quarters?

Yeah, that's part of our loan growth, this quarter was also the line utilization that pick up. And I'd say our lines return to kind of long-term averages. At the moment at the end of the fourth quarter and it is in our loan tables. You can see how the quarter to quarter line utilization benefits or take off the loan growth. But this last quarter was a good line utilization, it seemed like we were starting to drawdown.

Okay. Great. Appreciate the color.

You bet. Thank you.

Next we'll hear from Andrew Terrell of Stephens.

Hey, guys. This is on for Andrew. Congrats on the great quarter.

Thank you, John.

Aldis, I guess quick question on the deposit base again. I guess, how should we be thinking about deposit beta as NBHC in a rising rate environment? And is there any reason to think that your beta in this cycle will be dissimilar to last cycle? And can you remind us, like what you assume in your disclosed NII sensitivity for deposit beta?

First of all, I want to highlight that 40% of our deposits are non-interest bearing, which puts us in a good position for any rising rate environment. In the scenario with a 5.4% increase and a 100 basis point rate shock that I mentioned earlier, there is about a 30% deposit beta on total deposits. However, if we look specifically at interest-bearing deposits, that beta rises to 50%. To address your question, our projections are quite conservative; historically, during the last tightening cycle, our deposit beta ranged from 10% to 25%, depending on the time frame. For those on the call today, to put the 5.4% at a 100 basis point rate shock into perspective, it translates to approximately $2 million, which would lead to about a $12 million annualized increase following a 100 basis point rise in the Fed funds rate.

Got you. That's helpful. I appreciate the color. And one last one, can you remind us of the repricing dynamics of the loan portfolio? How much is floating rate adjustable fixed? And do you guys have loan force in place on any of those floating rate?

Our loan book consists of about 40% to 42% variable rate loans that are tied to indices like prime or LIBOR. Out of that, only 15% have rate floors that won't adjust for the first 50 to 75 basis points. Most of our LIBOR loans will benefit immediately as rates rise.

Awesome. I appreciate the color. That's all I had. I'll step back.

All right. Thank you, John. April?

Thank you. And I am showing we have no further questions at this time. I would now like to turn the call back over to Mr. Laney for any closing remarks.

All right. Thank you, April. As always, I would just thank you for your interest in our company. We certainly are open to any follow-on questions should anyone have them after this meeting. Again, thank you and have a good day.

And this concludes today's conference call. If you would like to listen to the telephone replay for this call, it will be available beginning in approximately 4 hours and will run through January 26, 2022 by dialing 888-203-1112 and referencing pass code 2454367. The earnings release and an online replay of this call will also be available on the company's website on the new Investor Relations page. Thank you very much and have a great day. You may now disconnect.