National Bank Holdings Corp Q1 FY2022 Earnings Call

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2022, First Quarter earnings call. My name is Keith 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 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, non-interest income, margins, allowance, taxes, and non-interest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties, and other factors which are disclosed in more detail in the company's most recent filings with the U.S. Securities and Exchange Commission. These statements speak only as of the date of this call. And National Bank Holdings Corporation will undertake no obligation to update or revise these statements. In addition, this call will reference certain non-GAAP measures which National Bank Holdings Corporation believes provides useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations section of www.nationalbankholdings.com. It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman, President, and CEO, Mr. Timothy Laney.

Thank you, Keith. Good morning and thank you for joining us as we discuss both National Bank Holdings' First Quarter 2022 financial results and last evening's announced acquisition of Utah-based Rock Canyon Bank. I'm joined by Aldis Birkans, our Chief Financial Officer. With respect to the first quarter, our focus on small and medium-sized businesses operating in great U.S. markets continued to produce solid results. Our teams delivered record first quarter annualized loan growth of 15.8%. Most importantly, the new originations remain granular and diversified in nature. We're working with businesses whose balance sheets are very strong and well-positioned for economic shocks. To that end, we ended the quarter with record low non-performing assets and positive asset quality trends across the board. Our focus on earning the full relationship of our clients resulted in attractive growth in transaction deposits and treasury management fees. I'll add that we feel very good about our new market share gains and our momentum on that front. Finally, it's noteworthy that net interest income is well-positioned to benefit from rising rates, and more broadly, we believe our balance sheet is well-positioned to avoid major AOCI shocks. Turning to last evening's announcement on the acquisition of Utah's Rock Canyon Bank. This move accelerates our strategy to expand in the Salt Lake City region while also adding a best-in-class SBA program that is scalable across our geographic footprint. Rock Canyon is the number one bank originator of SBA loans in the state of Utah. We fully expect to deliver increased income from this impressive capability and I do want to take a moment to recognize and thank the Rowley Family for the great bank that they've built and for their willingness to establish this new partnership on an exclusive basis. When coupled with our recently announced acquisition of the Bank of Jackson Hole, we have added scalable fee income capabilities in the SBA and wealth management areas while expanding into some of the most attractive markets in the United States. On that note, I'll turn the call over to Aldis for more details.

Alright, thank you Timothy and good morning, everyone. I will cover the Rock Canyon Bank acquisition deal metrics and provide an update on our first-quarter results as well as an update on our full-year 2022 guidance. We're pleased to announce another acquisition in a short period of time. We believe the combination of NBH Bank, Rock Canyon Bank, and the previously announced acquisition of Bank of Jackson Hole results in a highly diversified, well-capitalized balance sheet and adds multiple additional revenue streams through SBA loan production and wealth management business. With regard to this acquisition, Rock Canyon Bank is an $800 million asset bank that has $500 million in loan balances and $740 million in deposits. They operate in the fast-growing Salt Lake City and Provo region. Based on the April 14th, 2022 NBHC stock price of $38.69 million, this is a $136 million transaction. As part of the total consideration, NBH will issue a fixed amount of 3.1 million shares and pay $16.1 million in cash. This represents approximately 1.8 times their tangible book value and results in a 2.5-year tangible book value dilution earn-back for NBHC shareholders using the crossover method. As always, we have been realistic and appropriately conservative with our modeling assumptions, and we have not built in any additional revenue synergies into our financial modeling. Now turning to the first quarter's results. For the first quarter, NBHC earned net income of $18.4 million or $0.60 of earnings per diluted share. We grew our loan book a strong 15.8% annualized, led by growth in our commercial loan book of 19.7%. During the first quarter, we grew our average transaction deposit balances by 4.9% annualized and continued to maintain diligent expense control with total non-interest expense decreasing by $0.4 million on a linked-quarter basis. As we discussed during our last earnings call, we entered the year with strong loan pipelines, which clearly contributed to record first-quarter loan fundings, and the second highest quarter of loan production in our company's history. During the quarter, we funded $419.7 million in loans and have funded nearly $1.7 billion in loans over the past four quarters. Further, our pipelines remain strong. Looking ahead, while multiple geopolitical and inflationary uncertainties could weigh on the U.S. economy, we feel comfortable with our prior loan growth guidance of 10% to 12% for the full year. Furthermore, at this point, we see enough momentum to deliver or even beat the high-end of this range. The first quarter's fully taxable equivalent net interest margin was 2.9% and the fully taxable equivalent net interest income was $48 million as all material PBPB fee impact was already realized last year. While the impact of March's 25 basis point increase in the federal funds rate had a nominal impact on our first quarter results, as Timothy mentioned, NBHC's net interest income will benefit nicely from this and any further short-term interest rate increases in the coming quarters. Going forward, we project net interest margin to expand to 3% in the second quarter of this year and to retain positive trends in the following quarters. In terms of our asset quality, it remains strong with positive trends across the board. The first quarter's net charge-offs were just five basis points annualized, non-performing assets decreased another four basis points, and non-accrual loans remained at the record low 24 basis points of total loans. The strong asset quality, along with the current credit outlook, resulted in a $322,000 loan loss allowance release this quarter. The resulting allowance to total loans at the quarter end was 1.04%. Total first-quarter non-interest income was $19.1 million, with both service charges and bank card income up nicely, increasing 3.8% on a year-over-year basis. The first quarter is seasonally slow for these line items, but we continue to experience nice growth on a year-over-year basis. Mortgage income was clearly impacted by the rapid increase in mortgage rates. Having said that, when breaking down our mortgage revenues between volume and rate, it's notable that our lock volume during the first quarter was 6% higher than during the fourth quarter of last year. On the other hand, the margin compression resulted in a $721,000 decrease in our mortgage revenue on a linked-quarter basis. Looking ahead for the full year 2022, we are adjusting our fee income guidance to $78 million to $82 million. The decrease from the prior guidance is entirely due to the impact of higher mortgage rates on our mortgage revenue. We expect net interest income expansion and expense control to mitigate this decline. Turning to expenses, non-interest expense for this quarter was $44.1 million, a net reduction of $423,000 from the prior quarter. This was a clean quarter for our expense run rates, and the decrease in the compensation line was mainly due to fewer payroll days during the quarter. For full year 2022, we are lowering our guidance for non-interest expense to be in the range of $183 million to $187 million. This guidance is for our core operations and does not include M&A related transaction costs. As a reminder, total projected transaction costs for the two deals are approximately $23.5 million on a pre-tax basis. During the first quarter of 2022, we incurred approximately $250,000 in transaction related costs. Our capital ratios continue to remain strong at a 10.5% tier 1 leverage ratio and a 13.9% CET1 ratio as of the quarter-end. On a pro-forma basis with the two announced M&A transactions, we will continue to maintain a strong 9% tier 1 leverage ratio and a 12% CET1 ratio, still providing us with plenty of optionality. And with that, I will turn it back to Timothy.

Thank you, Aldis. We clearly believe the acquisitions of Rock Canyon and the Bank of Jackson Hole represent attractive uses of excess capital. My expectation is that we will enhance our operating leverage while also growing new diverse revenue streams and an attractive low-cost deposit basis. We'll remain focused on expanding into fast-growing and strategically important markets while adding capabilities that will be leveraged across our geographic and unified platforms. And on that note, Keith, I'll stop and ask you to open up the lines for questions.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please signal by pressing *, please ensure your mute function is turned off to allow your signal to reach our equipment. We'll take our first question from Brett Rabatin from Hovde Group, LLC, please go ahead.

Hey, guys. Good morning.

Good morning.

Morning.

Congrats on another deal. Two questions around the transaction. One obviously, the other deal was a big opportunity on the trust and asset management side, and this one is from a fee income perspective with SBA. It looks like they did $12 million of fee income last year. Can you maybe quantify the SBA opportunity as you see it being placed on your footprint or your operations? And then can you talk about their loan portfolio yield, which I think is about 7%, so it's obviously a little higher yielding portfolio?

Yes, I'll take the second part first. So yes, their portfolio is yielding nicely near 7%. They've been able to maintain it through this extremely low rate environment. One of the things we liked about it is their best practices, and they’ve been able to maintain it. As recently as the last quarter, this quarter, so as far as we can tell in terms of production levels, those are nice yields. In terms of SBA loan production, they originate nearly $200 million in SBA production a year, which would be a nice supplement to what we already do, totaling $1.7 billion loan production over the last four quarters for us. But what we are excited about is the visibility to transition, as Timothy mentioned, the best practices that we see in their business and across our footprint.

I would add that the way I think about it and we're not ready to provide guidance around what we expect this to scale to geographically and ultimately to unify. What I would tell you is that we have a strong SBA business at now. National Bank Holdings is focused on what I would say, the more complex SBA transactions. What we're very impressed with at Rock Canyon Bank, and it's the reason they are the number one bank SBA lender in the state of Utah, is they've really defined a very efficient process for addressing small and medium-sized business SBA loan needs. Speed is key here. But we've been very impressed with the quality of the administration and the underwriting that works, so we actually believe it will add an alternative stream and an alternative process for standard SBA business opportunities.

Okay. And just going back, Aldis, on the loan portfolio. I mean, looking at the regulatory filings, nothing stands out. Is SBA a big chunk of the 7% performance on the yield or are there other areas contributing to that?

No, it's across the board. They have some high grade loans, they have SBA, they have CNR, CRE, and all parts of the portfolio are conducive to our yields.

Okay. And the guidance for expenses, you added some color there on the end about the expenses for these deals. Does the fee income of $78 million to $80 million, does that guidance exclude or include the transactions closing later this year?

That excludes. So my guidance is purely on an NBHC-only basis. And I’ll be certainly we will look to close and integrate these deals as quickly as we can. But until we have more clarity on the regulatory applications, we will hold off on how much the offers contribute this year. I did want to provide the expense guidance given that the transaction costs will hit this year.

And with that $78 to $82 million guidance, would seem like you're implying that the mortgage revenues recover throughout the year, is that a fair assumption?

Yes. So the way I would look at it is we're projecting the mortgage revenues to be in line with the first quarter for the next couple of quarters and then have a seasonal slowdown in the fourth quarter.

Okay. And then a last quick one, and I'll let somebody else jump in. The tax rate this quarter, obviously lower. Can you talk about the sustainability of the tax rate or any thoughts around that going forward?

Yeah, I'll just say that if you're looking at the quarter relative to the prior quarter, our tax rate came down. I would put it closer to 17% to 18% at this point for the full year, but that will impact our net income, and the taxable income will be affected by these transaction costs, which is probably also the reason why the first quarter is a bit lower as we're starting to project that transaction costs hitting this year's taxable income.

And Brett, I would remind you as it relates to any step-down in mortgage-related revenue, we have always viewed the mortgage business as a nice hedge to our commercial banking business. We're certainly seeing volume ramp up in commercial, therefore we expect the net interest income to continue to grow. We would expect there to be some nice offset over the course of the year. More to come on that front, but that's the way we have always looked at these two businesses and how they operate in a complementary fashion.

Okay. Thanks. Appreciate all the color.

Alright. You bet, man.

We'll take our next question from Andrew Liesch with Piper Sandler Companies. Please go ahead.

Hey, good morning, guys. Congrats on another deal here.

Thank you.

The question on the loan growth that Rock Canyon has been putting up was like it's been pretty strong. Curious how much of that was from PPP? How much is it from retaining SBA loans? And are they selling all the guaranteed portion or are they retaining some of it? Just trying to get a sense of what growth could possibly be here from the acquired franchise going forward?

It’s a combination of all the above. Their PPP presence wasn't in terms of on-balance sheet growth that material. For example, they had all of the PPP loans gone as of the year-end. In terms of historical growth, yes, they have been solid double-digit growers on both sides of the balance sheet, not just loans and deposits. We took it down to more of my guided 2022 per NBH 10% to 12% levels to be conservative back to being conservative on assumptions. But that's how we model them going forward.

Got it. Okay, and then how does this bank affect your asset sensitivity? It seems like this available liquidity that they have makes NBH even more asset sensitive.

It is a fair assumption. Yes, they are sitting on $300 million of cash, but no liquid investments. Cash is clearly going to provide a lot of asset sensitivity and a lot of opportunity for us in these higher rates as well. So that's something that we like and frankly, again, not modeled in any way, shape, or form into our EPS accretion assumptions.

Got it. And then just under the deposit base, looks like there's some jumbo CDs in some broker deposits. Discuss the makeup of that. Do you intend to run those off just given that the rest of it is pretty low-cost funding and very core?

Exactly. So anything that is more of a wholesale type of deposit inherited from years before that, such as broker deposits, are planned to be runoff, and we're not going to do anything with those. We will have a very disciplined approach the way we've had on our relationship building on the deposit side with our clients and continuing to attract core deposits.

Got it. Very helpful. Convert my questions. I'll step back. Thank you.

Thanks, Andrew.

We'll take our next question from Jeffrey Rulis with D. A. Davidson & Co. Please go ahead.

Good morning, Jeffrey.

Good morning. So clearly, there's a common thread with these last couple of deals on the diversity of the fee income side. And I guess strategically just trying to think about the opportunity, not only retain what these banks do well, but also how you can extend that to your legacy platform. So maybe just in this, I may be oversimplifying, but if the bank is, call it 25% of revenues or fee income in kind of a normalized mortgage environment, is there a way that we could talk about what these banks would do to you in the short term, say they're closed in the early part of this year or early next year? What that target of fee income to revenue would be? And then fully flex what that could be. Again, I apologize if that's oversimplifying, but just trying to get a sense for you retain the business of what you buy, but as you extend it to your platform, what it could look like.

You're asking the perfect question. We're just not at a point where we're comfortable providing guidance. But the framework that you're using to think about where this could go is exactly where our heads are at. We have no doubt that both capabilities, but wealth management and this particular SBA capability, are going to very quickly contribute across the rest of our franchise. That will be a focus. I would also say we should not lose sight of the fact that this puts us in incredibly attractive markets, whether we're talking about the wealth market of Jackson Hole or the growth market of Boise or the expansion in Salt Lake City and the surrounding region. I would tell you, we believe we've been, as we always are, relatively conservative in our outlook for what these two great banks will bring to NBH.

Okay. Appreciate it.

That's a long way of saying we're on the same page and we'll be coming back to you with guidance and an appropriate time frame.

Makes sense. While discussing the deal, Aldis, can you provide the tangible book dilution as a percentage and the estimated double-count impact from this transaction?

Yeah. So the day one dilution is 4% on our tangible book as modeled as of December 31st. In terms of double-counting, right now what we are assuming about the double-count is equal to non-PCB mark.

Okay. Regarding your broader question, Aldis, you mentioned previously that when we achieve 3% in the second quarter, liquidity impacts that margin by a certain number of basis points. If we were to hypothetically balance things out and adjust the balance sheet, have you estimated how much that margin would be affected by liquidity? Thank you.

Yes. There are two ways to approach rightsizing. You can add loans to increase interest income, or you can reduce cash. Taking out cash is the more cautious approach. Currently, in the first quarter, we are seeing about a 30 basis points compression impact from cash. In the next quarter, when we report a 3% projection, we estimate the cash impact will be around 26 to 27 basis points. Therefore, our core margin could range from 3% up to 3.30% excluding cash or excess liquidity.

Great. Yes, that does. That's exactly what I was looking for. So thank you.

Jeffrey, you were asking about tangible book dilution, or our use of tangible book here. As we look at a number of banks reporting 10% to 15% hits to their tangible book as a result of AOCI, we feel pretty good about the use of capital here, particularly when you think about the accretion of earnings that we're picking up. We feel reasonably confident that this 2.5 year earn-back target is attainable, as we consider the current times and how we deploy capital.

Good point. Thank you.

I'll be specific about tangible book value dilution, which is currently at 4.6% to be precise.

Got it.

We'll take our next question from Kelly Motta with Keefe, Bruyette & Woods, Inc. Please go ahead.

Hey, Timothy, and Aldis. Good morning, congrats on the deal.

Thank you.

And maybe sticking with capital with the Q deals pending. Is it fair to say that you will be out of the market for buybacks for the remainder of the year, at least while they are pending, or do you have any stock plans in place to allow you to be active while those are ongoing?

I will simply say that is not fair to say.

Got it. Okay. That's helpful. And then circling back to this, the income guidance, I know a lot of the differences are just what's going on with the mortgage market. I don't believe you had much by way of the unified revenues coming in this year, but just wanted to confirm that and also see if what the deals feel like they add some nice fee diversification that you can export to unified. If the pending transactions change your thoughts or timeline at all in terms of implementing to unify.

We really think at this point in 2022 that the likelihood of seeing incremental contribution would come out of the Finstro partnership and investment, which will be a capability within unified. But we do not expect to have enough of the framework in place with unified nor enough time in terms of having closed these two transactions in '22 to see a convergence of those capabilities this year. Certainly, over time, both of those capabilities and our need for those capabilities were strategic drivers of the acquisitions.

And I'll add on to be fair on the other side of the income statement on expense as we haven't had a whole lot of unified expenses hitting just yet either, so if you look at the projection it does imply a bit of a ramp-up on the quarterly run rate basis and a portion of that is based on our unified build-out expense that I guided at the beginning of the year.

Got it. Okay. That's helpful. And then turning to the NIM, you helped with the cash component in the earlier question, but just wondering, with that 3%, how much of that is related just to the rate hike we had? And if you’re building out any further rate increases in 2Q that hope to improve that number?

No. What we have historically done is deal with the information that we know and not put in any forecasting or any expected rate hikes or for that matter, rate cuts when we do our projections. So it is a true impact from the loan growth. I will not dismiss the loan growth; our loan growth this last quarter was extremely solid and came in a little bit later in the quarter and didn't have a whole lot of benefit. In the first quarter's net interest income, if our average balances grew only $37 million, if you look at our SBA balances, be jumping off at a $161 million higher than the prior quarter. So there is a $120 million of earning asset balance day one in the second quarter that is earning quite a bit more interest income, and certainly the rate increases, I'm estimating about, given there was late in the quarter again, the March 16th increase had a nominal benefit of 2 to 3 basis points and it originated loan yield in the first quarter, I think we have about a 5 to 6 basis points pick up originated loan yield from that in the second quarter.

Great. That's super helpful. Thanks, Aldis, and thanks, Timothy. Appreciate it.

Thanks, Kelly. Thanks for the questions.

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

Hey, good morning.

Good morning.

Congrats on the deal.

Thank you, Andrew. Good morning.

Maybe just a first kind of quick question on acquisition. I think with both of these kind of in the fold, especially if you close them before the end of 2022 and just given some of the growth, it seems like you’ll be pretty close to that $10 billion mark on total assets. I was hoping you had kind of the Durbin impact for the pro-forma company, if you could disclose it?

We do. In terms of individual deal accretion numbers that we put into the two decks, they are viewed on a standalone basis. We certainly don't sugarcoat the $10 billion mark nor do we do so on a pro forma basis just yet. There's a time delay, obviously, in terms of when the Durbin impact kicks in. Having said that, our estimate is on a pro forma basis, and the Durbin impact is only going to be about two percentage points on total revenues once we cross $10 billion.

Okay. Got it. I appreciate it. And Aldis, I wanted to clarify. I think last quarter when we discussed the expense guidance, it was exclusive of $4 million to $5 million of build-out costs related to unified, but it sounds like just a minute ago that the updated guidance for $183 million to $187 million includes those costs. Did I hear that correctly?

The second part you did; last year or last quarter when I guided for full-year, it also included. So both my prior guidance and this guidance apples-to-apples reduction and both include unified build-out costs.

Understand. Okay. And then I hear you on the loan growth commentary, and it sounds very strong. I was hoping you could speak to maybe how you're thinking about growth on the other side of the balance sheet just from an organic standpoint and within the deposit book?

I think our model serves us extraordinarily well with a focus on small and medium-sized businesses. It's so critical to have bankers that are rewarded and focused on capturing the full relationship of a client. Having treasury management capabilities that allow us to compete with the majors has been a huge differentiator. We will continue to watch our low-cost transaction deposit relationships grow, and with that growth, we're talking about very sticky, low-cost, attractive funding for the bank. As Aldis pointed out earlier, we've never been reliant on wholesale funding; it's not something we ever expect to have to do. Certainly with acquisitions like this, delivering very attractive low-cost deposit bases just puts us in a room to take very nice, attractive, low-cost liquidity and put it to work. I think the trap, as we've discussed before, is that bank leadership teams fall into simply looking at the kind of stimulus-related balances that are sitting at a lot of balance sheets and they get complacent. What you really need to do is measure new relationship activity. Are you taking market share? Are you capturing the full relationships of those clients? When you do that, I think it positions you well for the future.

That's very helpful. I appreciate it. If I could just speak to one last question, I saw the bond book was built a little bit this past quarter. You still have a fair amount of excess liquidity on the balance sheet, and I know both of the announced acquisitions improve that excess liquidity position. Does it lead you to be more inclined to put some money to work in the bond book in future quarters, or should we think about the bond book as kind of static from here? Thanks.

Another great question. That's a good question. I think it all depends. Certainly, the yield curve backing up to the point where it is starts becoming more attractive, especially if you stop thinking and believing in stagflation or slowdown of U.S. economy and you start thinking about, will long-term rates go much higher? We will be optimistic. I would say without these two transactions, less so. However, with these two transactions coming onto our books and knowing that we will receive the cash balances of each one of them, we might free invest some of that their cash on our balance sheet and then absorb our own cash as a replacement in terms of our liquidity on day one, if that makes sense.

Yeah. That makes total sense. I appreciate you guys both taking my questions, and congrats on another deal.

Thank you very much.

And thank you. I am showing we have no further questions at this time. I will turn the call back to Mr. Laney for his closing remarks.

Great. Thank you very much. I do want to thank everyone that joined us today. We are clearly pleased to be at a point in the year where we've announced two incredibly attractive acquisitions, great new partners, and great new teams. I look forward to working with our new teammates. We appreciate all the questions this morning. I wish everyone a good day and a great rest of the week. Thank you.

This concludes today's conference. If you would like to listen to the telephone replay of this call, it will be available beginning in approximately four hours and will run through April 24th, 2022, by dialing 88820311112, and referencing passcode 2525902. The earnings release and an online replay of this call will also be available on the company's website, in the Investor Relations page. Thank you very much and have a great day. You may now disconnect.