National Bank Holdings Corporation

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2022 Third Quarter Earnings Call. My name is Keith, and I'll 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 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 risk and uncertainties and other factors, which are disclosed in more detail in the company's most recent filings with the U.S. Securities 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. Thanks, Keith. Good morning, and thank you for joining us as we discuss National Bank Holdings' third quarter 2022 financial results. I'm joined by Aldous Berkins, our Chief Financial Officer. We're pleased to deliver quarterly core earnings of 80 cents per share. We recorded organic loan growth of 30.2% and increased average total deposits 10.3% annualized. It's noteworthy that today we have experienced a nominal increase in the cost of deposits. It's also important to point out that all asset quality metrics remain strong and that we have prudently increased the conservativeness of our underwriting standards in light of questions around the economy. On that note, I'll turn the call over to our CFO, Aldous Berkins. Aldous? All right.

Thanks, Tim, and good morning. We delivered another strong quarter of financial performance while also completing the acquisition of Rock Canyon Bank. Just to bring you up to date, so far in October, we also have closed on the Bank of Jackson Hole acquisition, and successfully completed the Rock Canyon Bank system integration. The integration of Bank of Jackson hold systems is scheduled for later this quarter and will allow us to enter the next year well-positioned to build on the opportunities each bank presents. Overall, our strong results during the quarter were driven by exceptional loan growth, expanding net interest margin, and as always, carefully managed expenses. For the third quarter 2022, we reported net earnings of $15.8 million, or 50 cents per diluted share. During the quarter, we realized approximately $7 million of transaction-related expenses, as well as increased our loan loss provision expense by $5.4 million as part of the day one CISO reserve for the Rock Canyon loan portfolio. Excluding these transaction-related items, our adjusted core net income was $25.3 million, or $0.80 per diluted share, which is a 16% increase over the prior quarter's adjusted results. Our pre-tax, pre-provision net revenue, excluding the transaction expenses, grew $11.3 million, or 38% on the quarter basis. And as a reminder, this quarter included only one month of Rock Canyon Bank's financial performance. We are capitalizing on the economic resilience of our markets and continue to gain market share across our geographies. During the quarter, we funded $631.6 million in loan originations, which was another quarterly record. The total loan portfolio grew $905 million during the third quarter, and after adjusting out the Rock Canyon Bank Loan Book addition of $538 million, our loan portfolio grew a strong 30.2% annualized. Net interest margin expanded 63 basis points, and fully taxable net interest income increased $13.1 million, or 90.9% annualized on the quarter basis. And while average earning assets grew $180 million, or 10.5% annualized during the quarter, the main driver for the net interest income growth was the loan portfolio repricing. The total average rate for loan self-reinvestment increased from 4.4% in the second quarter to 5.0% in Q3. We were successful in managing deposit betas during the quarter, and the total cost of deposits increased just two basis points. Looking ahead for the fourth quarter 2022, at this time, we project NBH's net interest margin to remain at around 4%. In terms of our asset quality, it remains strong with decreases in both declassified and criticized loan ratios. The third quarter's net charge-offs were just one basis point annualized, and both the non-performing asset ratio and the NPO ratio remain low. During the quarter, we recorded a provision expense of $12.7 million. And as I already mentioned earlier, $5.4 million was given by the establishment of day one allowance for credit losses for the Rock Canyon bank loan portfolio. Approximately $3.9 million of the provision expense was to support the strong organic loan growth, and the remainder was CECL model-driven increase. That reflects the increased economic uncertainty, as indicated by the Moody's forecast scenarios. As a result, our ACL ratio to total loans entered the quarter at 1.15%. Total third quarter's non-interest income was $17.4 million. or a $600,000 increase from the second quarter. The continued slowdown of our mortgage business was more than offset by record quarterly bank card revenues and strong core banking service charge income, as well as a nice unrealized gains from our equity method investments. Looking ahead, for the fourth quarter 2022, we are projecting our total fee income to be in the $15 to $17 million range. Non-interest expense totaled $53.9 million and included approximately $7 million of acquisition-related costs. On a year-to-date basis, we have realized approximately $8.3 million of acquisition-related expenses, and at this time, we are projecting to come in well below our toll-modeled transaction costs for both transactions. Our non-interest expense run rate remains well-controlled. Excluding these acquisition-related expenses, the third quarter's core banking expense was $47 million, compared to $44.5 million of core expense in the second quarter. The linked quarter increase was primarily driven by the addition of one month of Rock Canyon's expenses. For the fourth quarter of 2022, we are projecting non-interest expense to be in the range of $64 to $66 million. Included in this projection is an estimated $5 to $6 million of transaction-related expenses yet to be realized, as well as a full quarter of expense run rate from both acquisitions. Most of the cost-saving efficiencies from the two bank acquisitions are being realized gradually and will continue through the fourth quarter and into 2023. As such, I will provide more guidance with the full year 2023 projections on January's earnings call. Our capital ratios remain strong at 12.8% common equity Tier 1 ratio and 9.6% tangible common equity ratio. Our tangible book value per share was $22.40 as of September 30th, and it reflects the full impact of the Rock Canyon Bank acquisition. We closed the Bank of Jackson Hole acquisition on October 1st, and the purchase accounting impact of this transaction will be reflected in the Q4 results. Our effective tax rate for the quarter was 20.1%, an increase driven by the higher-than-projected pre-tax income through September 30th. For the fourth quarter, we project the tax rate to return to 18% to 19% range. We ended the quarter with 33.2 million shares outstanding, and after incorporating the share issuance for the Bank of Jackson Hall acquisition, we project the fourth quarter's average diluted shares to be around 38 million shares outstanding. And with that, I'll turn it back to you. Thanks, Aldis.