National Bank Holdings Corporation

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2021 Third Quarter Earnings Call. My name is Nick, and I will be your conference operator for today. At this time, all participant lines 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 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 Holding 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 Holdings Corporation's Chairman, President, and CEO, Mr. Tim Laney.

Thank you, Nick. Good morning, and thanks for joining National Bank Holdings' third quarter 2021 earnings call. I'm joined by our Chief Financial Officer, Aldous Berkins. Our focus on growing share in attractive markets is translating into strong top and bottom line results. I believe the quality of our new business pipeline will translate into attractive results through the fourth quarter and into 2022. I'm very proud of our bankers' engagement with our small and medium-sized business clients and prospects, and I view this work as a differentiating driver of the momentum we're building in our business. We continue to be prudent in our underwriting of credit risk, and we feel very good about the health of our loan portfolio. On that point, I'll turn the call over to Aldous to cover the quarter in more detail. Aldous? All right.

Thank you, Tim, and good morning, everyone. Thank you for joining our earnings call this quarter. We are pleased to report third quarter's earnings of $19.8 million, or 64 cents per diluted share. This quarter was highlighted by record loan originations, an exceptionally clean credit book, and capital deployment through an investment in Finsterau Global Holdings, as well as stock or purchases. During the quarter, we also thought we'll improve the company's balance sheet through the sale of a majority of our mortgage servicing rights. I will cover these items in more detail later, but first, let's address our loan growth. Third quarter's loan fundings were a record $413.3 million. As a result, we grew our core loan book during the quarter a solid 16.5% annualized. The loan growth was broad-based, with all asset classes and geographies contributing to the loan balance growth. Furthermore, we continue to be very pleased with our bankers' business development efforts, which are generating strong pipelines across all of our markets. At this time, we project to exceed our original guidance for loan growth from the prior quarter and expect a near double-digit annualized growth for the fourth quarter of 2021 again. With regards to the Patriot Protection Program loans, we had $76.8 million outstanding as of September 30th, 2021. The remaining PPP loan deferred revenue balance is $2.4 million, and we expect most of this fee to be recognized in the fourth quarter as the forgiveness efforts continue. Turning to deposits, This quarter, we continued the strong growth in deposits, with average transaction deposits increasing 5.2% annualized. Our cost of toll deposits decreased another three basis points this quarter to a low 21 basis points. Strong deposit growth benefited our average earning asset base, which similarly grew $62.5 million. And as we discussed during the last earnings call, we have started deploying cash into higher-yielding loan balances. The resulting fully taxable equivalent net interest margin during the third quarter expanded 11 basis points to 2.93%, and the excess liquidity still had a 36 basis point dilutive impact on our margin. This quarter's fully taxable equivalent net interest income was $48.9 million and included $2.6 million of PPP loan fees. Stripping out the PPP loan fees, our linked quarter core net interest income grew 19.8% annualized. Out-of-asset quality remains strong with another quarter of solid reductions in non-performing loans and non-performing assets. NPAs decreased 9.6% this quarter and are 27% lower than one year ago. Net charge-offs for the quarter were just two basis points annualized. These excellent credit trends combined with improving economic forecast projections from Moody's resulted in a reduced calculated reserve and was sufficient to support the new loan growth. and therefore required no provision expense this quarter. The resulting ACL total loans, excluding PPP, was 1.13% at quarter end. Total third quarter's non-interest income was $28.5 million. Our client engagement for both consumer spending and business account activity continued to expand, with total service charges reflecting 5.5% growth this quarter over the third quarter of last year, in bank card fee revenue increased 12.2% over last year's third quarter. We also continued to execute on our banking center efficiency initiatives, which resulted in a sale of an additional banking center during the quarter. As a result, other non-interest income benefited from an $800,000 deposit premium gained this quarter. Additionally, this quarter we sold approximately $1.3 billion of our mortgage servicing portfolio, With the high mortgage production volumes, this portfolio had more than tripled since the beginning of the pandemic, and this was a strategic move to reduce the mortgage servicing asset risk. As a result of this sale, we reduced our intangible assets by approximately $11 million and realized a $1.3 million gain. The other key driver for this quarter's better mortgage revenue was the margin recovery as compared to the second quarter of 2021. For the remainder of the year, we project our total non-interest income to be in the range of $19 to $21 million. As always, large swings in long-term interest rates could impact both our mortgage production and this projection. Turning to expenses, this quarter's non-interest expense totaled $51.3 million and was elevated due to a couple of non-recurring items. During the quarter, we incurred $2.4 million in transaction-related expenses for the FinStro investment, as well as an $800,000 write-down on one Oreo property related to a prior bank acquisition. For the fourth quarter, we expect non-interest expense to return to the range of $45 to $46.5 million, consistent with our core run rate. With regards to capital, this quarter we invested $20 million in FinStro Global Holdings as part of our previously announced strategic partnership. This investment resulted in BH owning a 33% non-controlling interest in the company. Additionally, during the quarter, we had purchased $19.4 million of our stock. As a result of the stock buyback activity, the fully diluted share count for the fourth quarter is projected to decrease to around 30.8 million shares. Our capital ratios continue to remain strong at 10.43% Tier 1 leverage ratio and 14.57% common equity Tier 1 ratio. And finally, despite the stock buyback activity, our tangible book value per share increased 19 cents this quarter to $24.20. Tim, with that, I will turn it back to you.