National Bank Holdings Corporation

Good morning everyone and welcome to the National Bank Holdings Corporation 2022 Second Quarter Earnings Call. My name is Kyle 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, non-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. This statement speaks only as of the date of this call and National Bank Holdings Corporation undertakes no obligation to update or revise this statement. In addition, the call today will reference certain non-GAAP measures which National Bank Holdings Corporation believes provide useful information for investors, Reconciliation of these non-debt financial measures to the cap 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 Chairman, President, and CEO, Mr. Tim Lanny. Please go ahead, sir.

Thanks, Carl. Good morning, and thank you for joining us as we discuss National Bank Holdings' second quarter 2022 financial results. I'm joined by Aldous Berkins, our Chief Financial Officer. And our focus on small and medium-sized businesses operating in high-performing U.S. markets continues to produce solid results. Our teams delivered another record quarter of loan fundings, driving annualized loan growth of 12.3%. We remain prudent in our underwriting. We continue to work 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. Furthermore, if we took the cumulative losses from our recent stress test Using assumptions consistent with the severely adverse scenario used in the 2022 DFAS, we would operate with a Tier 1 leverage ratio of approximately 9%. 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. We're making solid progress on our regulatory approvals, having just received approval from the Federal Reserve for Rock Canyon Bank, and we remain on track for approval of the Bank of Jackson Hole acquisition. The more time we spend with these two banks and their teams, the more optimistic I am about their imminent contributions to our financial performance. And on that note, I'll turn the call over to Aldous Berkins. Aldous? Aldous Berkins All right. Thanks, Tim, and good morning.

Thank you for joining our earnings call this quarter. For the second quarter, 2022, we reported net earnings of $20.4 million, or 67 cents per diluted share. Our bankers delivered another quarter of solid long growth. Our expenses continue to be well managed, and the credit quality remained exceptionally strong. The closing and integration of our two previously announced bank acquisitions remains on track, and on the related note, during the quarter, we realized $1 million in M&A-related costs. During the quarter, we funded $492.5 million in loan originations, which was another quarterly record, and as a result, the loan portfolio grew a solid 12.3% annualized. As we have discussed in our prior earnings calls, we benefit from operating in markets that continue to outperform the national economic metrics on many fronts. And while high inflation and rapidly rising interest rates will impact many aspects of the economy, we are pleased with our new relationship pipeline activity as we enter the second half of 2022. We also entered this rate cycle with an asset-sensitive balance sheet, and the increasing interest rates benefited net interest margin nicely during the second quarter. The quarter's fully taxable equivalent net interest margin was 3.38%, or a 48 basis point increase from the prior quarter. Approximately 13 basis points of this increase was driven by accelerated income from an early payoff of an acquired loan, and the rest was driven by the balance sheet's asset-sensitive positioning. The total cost of deposit decreased to record low 16 basis points. Looking ahead for the second half of 2022, we project NPH's net interest margin to be in the 3.4 to 3.5% range. In terms of our asset quality, it remains strong with positive trends across the board. The second quarter's net charge-offs were just three basis points annualized, and both the non-performing assets ratio and the NPL ratio decreased another four basis points this quarter. Looking ahead and fully recognizing the increased risks to the U.S. economy, our CECL credit allowance reserve increased from 1.04% of total loans at the end of the first quarter to 1.06% at the end of the second quarter. The resulting second quarter's provision expense was $2.5 million. Total second quarter's non-interest income was $16.8 million, or a $2.3 million decrease from the first quarter. The link quarter decrease was entirely due to lower residential mortgage income as the rapidly rising mortgage rates materially slowed down mortgage volumes. Additionally, this quarter we selectively retained a higher portion of mortgage loans in our portfolio. Our client engagement for both consumer spending and business account activity was strong, and total service charges grew 26.6% annualized on a link quarter basis. Similarly, total bank card revenues grew 40.7% annualized on the link quarter basis. Looking ahead for the second half of 2022, we are projecting our total fee income to be in the $30 to $32 million range. Non-interest expense totaled $45.6 million and included approximately $1 million of acquisition-related costs. Excluding these acquisition-related expenses, the core bank expense run rate was relatively flat for the first quarter and reflects our continued expense management efforts. For the second half of 2022, we are projecting non-interest expense to be in the range of $92 to $95 million. To be clear, these projections exclude M&A-related costs. Finally, our capital ratios remain strong at 13.75% common equity Tier 1 ratio and 9.99% tangible common equity. As I already mentioned, our two M&A deals remain on track. As we have been working with our future teammates throughout the summer, we are becoming increasingly optimistic about the strategic and financial benefits of these deals, and we look forward to providing more guidance on these transactions in the coming quarters. Tim, with that, I will turn it back to you.