National Bank Holdings Corporation

Please stand by. We're about to begin. 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 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 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 Berkins. We finished 2021 with record earnings and strong momentum as we enter the new year. Our team is delivering record levels of long 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 2Unify, We believe we can hold core expenses flat to 2021 levels. On that note, I'll turn the call over to Aldous for more detail on our fourth quarter financial performance and 2022 expectations. Aldous?

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 74 cents of earnings per diluted share. For the full year 2021, we reported a record net income of $93.6 million, were $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 high 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 quarter's 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. The total cost of deposits decreased another three basis points to 18 basis points this quarter. and we project the cost of deposits to settle at the 17 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 fees and an $800,000 of accelerated market 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 remains strong with another quarter of solid reductions in non-performing loans and just two basis points of annualized net charge-offs. For the full year 2021, our net charge-offs were just three basis points, and during the year we reduced NPLs and NPAs 47% and 29% respectively. The fourth quarter's provision expense of just $132,000 was a result of the reserve requirements for our loan growth being partially upset by our strong asset quality and an improved economic outlook in the Moody's forecast and our CECL model. As a result, our year-end ACL total loans, excluding PPP, was 1.11%. Total non-interest income for the fourth quarter was $22.2 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 million-dollar 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 to 98 million dollars. Our core banking fees are projected to continue to grow in its 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 lowered 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 the fence rope and figure investments. This was part of our To Unify initiative. Looking ahead for 2022, We project approximately $4 to $5 million in expenses related to the Unify ecosystem buildup. Inclusive of this investment, the total non-interest expense is projected to be in the range of $189 to $193 million. As Tim already covered, HAF sent out investment into Unify, 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 repurchased 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 remain strong at 10.39% Tier 1 leverage ratio and 14.26% common equity Tier 1 ratio. And finally, even with our stock buyback activity, our tangible book value per share increased 13 cents this quarter to $24.33. Tim, with that, I will turn it back to you.