National Bank Holdings Corporation

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2023 First Quarter Earnings Call. My name is Anna, 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 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 will reference certain non-GAAP measures which National Bank Holdings Corporation believes provides a 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 introduce National Bank Holdings Corporation's Chairman, President and CEO, Mr. Tim Laney.

Thank you, Anna. Good morning and welcome to National Bank Holdings' first quarter 2023 earnings call. I'm joined by Aldous Berkins, our Chief Financial Officer. We delivered record net income during the quarter and a record return on tangible common equity of 20.86%. We maintained a net interest margin of 4.39%, as a result of loan pricing discipline offsetting the rise in cost of deposits. We benefit from a granular and well-diversified deposit base with a cost of funds coming in at 90 basis points. The loan portfolio performed extremely well during the quarter with annualized charge-offs of just one basis point and non-performing loans of just 13 basis points. We continued to build capital during the quarter with CET1 of 11.32%. After the quarter, on April 3rd, we acquired Camber Solutions. Camber diversifies our funding and fee income while giving us the ability to grow FDIC-insured deposits with very little incremental overhead. We look forward to discussing Camber in greater detail during Q&A And now I'll turn the call over to Aldous for more detail on the quarter. Aldous?

All right. Thank you, Tim, and good morning. As we reported yesterday afternoon, we delivered another strong quarter financial performance while also completing the strategically important acquisition of Canberra. The optionality provided by Canberra will diversify our sources of liquidity with FDIC insured deposits and will provide us with an additional source of fee income. In fact, this acquisition is already contributing nicely to our financials. and we project our loan-to-deposit ratio to be at or below 90% by the end of the second quarter of 2023. Before I summarize our quarter's financial results, I would like to provide a few headlines with regard to our balance sheet. As reported on Q4 call reports, approximately 70% of our deposits are FDS insured. Our deposit balances are granular, and we have no industry, geography, or single relationship concentrations. In fact, The average deposit balance on a full relationship basis is just $53,000 per relationship and $29,000 per account. This is before the incremental granularity benefit from the Canberra acquisition. Approximately 50% of our deposit balances are consumer deposits, which are nicely dispersed throughout our banking center network. For larger deposit relationships, we have been utilizing the ICS reciprocal FDIC SWE program already in place since 2019. As you know, we maintain a high-quality and short-duration loan book for loans with average life longer than five years. We have been using fair value balance sheet hedges. Additionally, approximately 23% of the loan book was marked to market for the higher rate environment in the fourth quarter of 2022 in conjunction with a purchase accounting for our two acquisitions last year. Lastly, we consistently run various stress test scenarios as part of our capital management process. To that end, we ended the first quarter with a CET ratio of 11.3%, and if we were to adjust the CET ratio for the unrealized losses residing in our investment securities book, it still would be a very healthy 9.6%. Now turning to the financial results. For the first quarter, we reported the record net income of $40.3 million, or $1.06 of earnings per diluted share. The first quarter's return on tangible assets was a record 1.8%, and the return on tangible equity was a record 20.9%. We continued to be pleased with the organic loan growth, and our teammates continued focus on building robust new client relationships. During the first quarter, our loan balances grew $124.8 million, or 7% annualized, New loan originations were $394 million, and given the high rate environment, we also experienced a slight slowdown in prepay activity. Having said that, we operate within markets with strong economies that are holding up nicely. Fully tax-equivalent net interest income for the quarter came in at $96.3 million, fairly consistent with the prior quarter despite two fewer calendar days. Net interest margin was 4.39% and remained unchanged from the prior quarter. We continued to benefit from the earning asset yields moving higher, which was aided by the continued Fed funds rate increases in Q1, as well as the loan pricing discipline by our bankers. Our new loan originations during the first quarter were at an average rate of 7.5%, which was clearly accretive to the existing originated loan book yields of mid-fives. The deposit balances during the quarter decreased $291 million on a spot basis, as we experienced deposit outflows due to clients moving towards higher-yielding products. The cost of deposits increased just 25 basis points for the first quarter of 2023. Our total deposit data this rate cycle to date has been less than 10%. Admittedly, and by design, we were slow at raising our deposit product rates. and our belief is that in order to grow core deposit balances for the rest of the year, we will have to become more competitive with our deposit rate offerings. Our projections point to hitting a 4% margin by the third quarter of 2023. This does not assume any future interest rate hikes or cuts by the Fed. In terms of our asset quality, it remains strong. Our non-agrural loan ratio improved another 10 basis points to 0.13%, and our non-performing asset ratio improved to 0.18%. The first quarter's net charge outs were just one basis point annualized. Given the improving credit metrics, provision expense this quarter was $900,000, primarily driven by new loan originations. Total non-interest income for the first quarter was $14.7 million, or a $500,000 increase from the prior quarter. Board banking service charges and bank card income typically have a seasonal slowdown in the first quarter, but when compared to the first quarter of 2022, both line items showed a nice double-digit growth. Non-interest expense for the first quarter totaled $58.3 million, which was lower than the fourth quarter's expense of $60.9 million when adjusted for M&A costs. The decrease in expenses this quarter was primarily due to $2.5 million of non-recurring payroll tax credits realized during the quarter. Looking ahead for the rest of 2023, we see our non-interest expenses trending towards our original four-year guidance of $243 to $247 million. The additional operating expenses related to the Canberra acquisition on a full-year basis are expected to offset the first quarter's payroll tax benefit. And with that, I'll turn it back to you. Great. Thank you, Aldous.