National Bank Holdings Corporation

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 company 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 this date of this call, and National Bank Holdings Corporation undertakes 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. Tim Lanney.

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 Berkins, 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 important, 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 and to unify. Rock Canyon is the number one bank originator of SBA loans in the state of Utah. We fully expect to deliver increased fee income from this impressive capability. And I do want to take a moment and recognize and thank the Roni 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 detail.

All right. Thank you, Tim, and good morning, everyone. I will cover the Rock Canyon Bank acquisition deal metrics and then provide an update on our first quarter's results, as well as an update on our full year 2022 guidance. We are 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 in a 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 regions. Based on the April 14, 2022 NBHC stock price of $38.69, 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 Rock Canyon's 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, which, as always, was 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 the link quarter basis. As we discussed during our last earnings call, we entered the year with strong loan pipelines. This 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 we have funded nearly $1.7 billion in loans over the past four quarters. Further, our pipelines remained 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 PPP fee impact was already realized last year. And while the impact of March's 25 basis point increase in the federal funds rate had a nominal impact in our first quarter results, as Tim 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 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 released this quarter. The resulting allowance of toll loans at the quarter end was 1.04%. Total first quarter's non-interest income was $19.1 million. Both service charges and bank card income were up nicely and increased 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 year-over-year basis. Mortgage income was clearly impacted by the rapid increase in mortgage rates. Having said this, 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 revenues on a one-quarter basis. Looking ahead for the full year 2022, we are adjusting our fee income guidance to $78 to $82 million. The decrease from the prior guidance is entirely due to the impact of high mortgage rates are having in our mortgage revenues. We expect net interest income expansion and expense control to mitigate this decline. Turning to expenses. Non-interest expense this quarter was $44.1 million, a reduction of $423,000 from the prior quarter. This was a clean quarter for our core expense run rate, 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 to $187 million. This guidance is for our core operations and does not include M&A related transaction costs, which is a reminder between the two deals are projected to be in approximately $23.5 million on 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 10.5% Tier 1 leverage ratio and 13.9% CET1 ratio out of the quarter end. On pro forma basis with the two announced M&A transactions, we will continue to maintain strong 9% Tier 1 leverage ratio and 12% CET1 ratio, still providing us with plenty of optionality. And with that, I will turn it back to you.