National Bank Holdings Corporation

Please stand by. We're about to begin. Good morning, everyone. Welcome to the National Bank Holdings Corporation 2021 Second Quarter Earnings Call. My name is Alan. I'll be your conference operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-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 undertakes no obligation to update or revise these statements. In addition, the call today will reference certain non-GAAP measures which National Bank Holdings Corporation believes provides useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations section of www.nationalbankholdings.com. It is now my pleasure to turn the call over and introduce National Bank Holding Corporation's Chairman, President, and CEO, Mr. Tim Laney. Please go ahead, sir.

Thank you, Alan. Good morning, and thanks for joining National Bank Holding's second quarter 2021 earnings call. I'm joined by our Chief Financial Officer, Aldous Birkins. With a renewed focus on growing market share, we realized annualized long growth of 8.4% during the quarter. Equally important, We entered the third quarter with a very strong pipeline of new relationships. We're realizing new relationship growth across our personal, business, and commercial banking segments. Credit quality continues to be near pristine, and we operate in markets that have largely recovered from the pandemic. As a result, I believe we are very well positioned for strong growth during the second half of the year. And on that note, Aldous, I'll hand it off to you. All right. Thank you, Simon.

Good morning, everyone. Thank you for joining our earnings call this quarter. For the second quarter, 2021, we reported net earnings of $24.2 million, so 77 cents per diluted share. Our return on average tangible assets was 1.41%, and our return on average tangible equity was 13.41%. Also, early in the quarter, we announced a second dividend increase for this calendar year, and our quarterly dividend now stands at $0.22 per share. As we discussed during last quarter's earnings call, we are excited about our loan pipelines, and our loan production this quarter did not disappoint. The second quarter's loan fundings were $362.1 million, which was our second highest non-PPP loan production quarter in history. As a result, we grew our core loan book during the quarter a solid 8.4% annualized. We continue to be very pleased with the business development efforts of our bankers, and our loan pipelines are building nicely across all of our markets. At this time, we project to grow our non-PPP loan books in the mid-to-high single digits annualized for the second half of 2021. With regards to the patient protection program loans, we had $129.6 million outstanding as of June 30, 2021. A few extra details on PPP efforts. To date, we have received payments and forgiveness on 99% of the Round 1 PPP loans, and more than a third of the Round 2 loans have also been forgiven. And at this pace, we expect most of the remaining PPP loan balances to be off our books by the end of this year. The remaining Paycheck Protection Program loan deferred revenue balance is $5 million, and accordingly, we expect most of this fee to be recognized over the next two quarters. Turning to deposits, this quarter we continued the strong growth in deposits with average transaction deposits increasing $347.1 million or 28.9% annualized. The second quarter also marked the first time our total average deposits crossed the $6 billion mark. More importantly, the cost of our total deposits decreased another four basis points this quarter and it has decreased a total of nine basis points during 2021. The strong deposit growth benefited our average earning asset base, which grew $323.1 million, or 20.8% annualized. The resulting fully taxable equivalent net interest margin was 2.82% in the second quarter, and the excess cash we are holding had a 41 basis point dilutive impact on our margin. Given the return of strong loan pipelines, in the coming quarters, we expect to start seeing our earning asset mix shift back from cash to higher-yielding loan balances. This quarter's fully taxable accrual and net interest income was $46.1 million and included $2 million of PPP loan fees. Stripping out the PPP loan fees, our lean quarter core net interest income grew $200,000, and as our earning asset mix normalizes, we project net interest income to grow in the coming quarters. Our asset quality remains strong with solid reductions in non-performing, criticized, and classified loans from the prior quarter. Net charge-offs for the quarter were just seven basis points. Our non-performing assets decreased 14% this quarter and are 28% lower than a year ago. Our NPA to toll loan ratio, excluding PPP loans, is now down to 0.46%. These excellent credit trends combined with improving economic forecast projections for Moody's, resulted in a CECL model provision release of $5.9 million this quarter. The resulting ACL to toll loans, excluding PPP, was 1.18%. Lastly, as a reminder, in addition to the allowance for credit losses, we continue to benefit from $8.8 million of fair value discounts from prior acquisitions. Total second quarter's non-interest income was $25.3 million. Our client engagement for both consumer spending and business account activity was strong, and we were able to deliver solid growth in our core banking fees. Total service charges grew 10.9% annualized on the linked quarter basis and 15.3% over the second quarter of 2020, while total bank card revenues grew 53.3% annualized on the linked quarter basis. and 26.3% over the second quarter of last year. The other non-interest income line benefited from $800,000 gain this quarter from the sale of real estate associated with consolidated bank incentive consolidations, which compared to $1.5 million of such gains realized during the first quarter of 2021. Looking ahead, with the second half of 2021, we are projecting our non-mortgage fee income to be in the $20 to $21 million range With regard to the residential mortgage business, the increase in longer-term rates during the first half of the second quarter impacted both mortgage volume as well as gain-on-sell margins. Mortgage banking income totaled $14 million this quarter, which was an $8.4 million decrease from the first quarter. The gain-on-sell margin came in from 3.5 points in the first quarter down to high twos in the second. This compression explained approximately 40% of this quarter's lower mortgage revenues. Having said that, we are encouraged to see some margin recovery about three points so far in July. The other contributing factor for the linked quarter revenue drop was reduced volumes from refinancing activity. Looking ahead, and given the current market conditions, we would project a mortgage-related revenue to be trending in the range of $20 to $25 million for the second half of 2021. Turning to expenses, non-interest expense totaled $46.3 million. On a link quarter basis, expenses decreased $3.3 billion, driven by lower mortgage-related commissions and lower banking center consolidation costs. We've also seen a decrease in our occupancy and equipment expense run rate, as the banking center consolidation efforts are starting to materialize in decent line items. For the second half of 2021, we are projecting non-interest expense to be in the range of $89 to $91 million. Finally, our capital ratios remain strong and provide for many options as we consider how to strategically deploy our excess capital in the future. Our tangible book value per share ended the quarter at $24.01 and has grown an 8% annualized for the first half of 2021. Tim, with that, I will turn it back to you.