National Bank Holdings Corporation

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2022 Fourth Quarter Earnings Call. My name is Jen, 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, 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, uncertainties, and other factors which are disclosed in more detail in the company's most recent filings with the US 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 Corporations Chairman, President and CEO, Mr. Tim Laney.

Thank you, Jen. Good morning and welcome to National Bank Holdings' fourth quarter and full year 2022 earnings call. I'm joined by Aldous Berkins, our Chief Financial Officer. Adjusting for one-time acquisition expenses, we delivered pre-provision net revenue of $50 million with adjusted net income totaling $34.5 million or $0.91 per share for the fourth quarter. Further, our adjusted return on tangible common equity was 18.37% for the quarter. Solid loan growth and a very low beta on deposits set us up well to deliver a net interest margin of 4.39%. Our team simultaneously closed and integrated two strategically important banking acquisitions that we believe will meaningfully contribute in 2023 and beyond. Finally, the quality of our loan portfolio remains very strong with excellent performance metrics across the board. I'll thank you and I'll turn the call over to Aldous to cover the quarter and full year in greater detail, as well as share guidance for 2023. Aldous? All right. Well, thank you, Tim, and good morning.

As Tim mentioned 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 2023. 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 delivered another strong quarter of financial performance while also completing the acquisition of Bank of Jackson Hole and fully converting systems for both recent bank acquisitions. For the fourth quarter, we reported net income of $16.7 million, or $0.44 of earnings per diluted share. During the quarter, we realized $6.8 million of transaction-related expenses, as well as recorded a day-one CECL loan loss provision expense of $16.3 million for the Bank of Jackson Hall's loan portfolio. As Tim shared, excluding these transaction-related items, our adjusted core net income was $34.5 million, so $0.91 per diluted share, which is a 14% increase over the prior quarter's adjusted results. Our pre-tax, pre-provision net revenue, excluding the transaction expenses, grew $8.9 million, so 22% on the link quarter basis. We're very pleased with the strong organic loan growth during 2022, and our teammates continued focus on building robust new client relationships. During the fourth quarter, our loan balances grew $1.5 billion. $1.2 billion was driven by the acquired Bank of Jackson whole loans. In quarter, originated balances grew another $310 million, or 21.5% annualized. On a full-year basis, including the two acquisitions, our loan book increased an impressive $2.7 billion, or 60%. We continue to operate in markets that are outperforming the broad national economic indicators on many fronts. However, our outlook for 2023 cannot ignore the prospects for slowing growth. For this year, we looked to grow loan balances in mid to high single digits. Net interest margin was 4.39% and expanded another 38 basis points this past quarter, and fully taxable net interest income increased $26 million on a linked quarter basis. The margin expansion was led by a 54 basis point increase in our originated loan portfolio yields, as both our variable rate loans and newly originated loans reflect a higher rate environment. The resulting earning asset yield widening was slightly upset by a 37 basis point widening in our total interest bearing liabilities. Our cost of deposits increased just 15 basis points for the full year 2022. Our total deposit data this rate cycle to date has been less than 5%. However, we are starting to see an increased rate competition for deposit balances and looking ahead for 2023, We expect that our cost of funds will close out some of the margin widening we experienced in 2022. As such, we estimate that the margin will return to around 4% by the fourth quarter of 2023. In terms of our asset quality, it remains strong. Our non-accrual ratio improved three basis points to 0.23%. Our non-performing asset ratio improved another four basis points to 0.28%. The fourth quarter's net charge-offs were just four basis points annualized and we finished the full year with net charge-offs of just three basis points. Both criticized and classified loan ratios also improved quarter over quarter. During the quarter, we recorded provision expense of $21.9 million, and as I mentioned earlier, $16.3 million was driven by the establishment of a day-one allowance for accrued losses for the Bank of Jackson whole loan portfolio. Approximately $5.6 million of the provision expense was to support quarter's strong organic loan growth, and to increase the allowance to total loan coverage, which reflects the increased economic uncertainty as indicated by the Moody's forecast scenarios. As a result, our ACL ratio to total loans ended the quarter at 1.24%, up from 1.15% at prior quarter end. Total non-interest income for the fourth quarter was $14.1 million, or a $3.2 million decrease from the prior quarter. The link quarter decrease was primarily driven by the slowdown in the residential banking, which seems to have settled into a lower run rate as of right now. Looking at the core banking service charge and bank card combined revenues, they increased $312,000 on link quarter basis and grew $2.1 million or 6.3% on a full year basis over 2021. For 2023, we project our total non-interest income to be in the range of $70 to $75 million. The projections include our new non-interest income revenue streams, including the trust business income, as well as projected gains on sale of SBA loans. Non-interest expense for the fourth quarter totaled $67.7 million and included approximately $6.8 million of acquisition-related costs. On a year-to-date basis, we have realized approximately $15.1 million of acquisition-related expenses, which was nearly 20% better than our initial estimates. Excluding the acquisition-related expenses, the fourth quarter's core operating expense was $60.9 million, compared to $46.9 million of core expense in the third quarter. The link quarter increase was primarily driven by the addition of a full quarter of both Rock Canyon and Bank of Jackson Hole operating expenses, as well as investments to unify build-out. Most M&A transaction-related items were recognized in 2022, and we do not expect additional costs to materially impact the 2023 expense. Looking ahead for 2023, we do project approximately $10 to $12 million of expense related to unified ecosystem build-out. Inclusive of this strategically important investment, the total non-interest expense is projected to be in the range of $243 to $247 million. When projecting the 2023 effective tax rate, we expect it to increase to the 20% to 21% range. The increase is entirely due to the projected higher taxable income in 2023. The past quarters and last year's effective tax rates benefited from increased deductions due to the M&A-related expenses. As always, this projected rate excludes the FTE adjustment on interest income. In terms of capital management, we ended the quarter with a strong 8.38% TCE ratio and a 9.29% Tier 1 leverage ratio. The tangible bulk value per share ended the year at $20.63 and fully reflects now the two M&A transactions. In terms of the share count, we project the alluded shares outstanding to remain around 38 million shares. And with that, I will turn it back to you.