National Bank Holdings Corporation (NYSE:NBHC) Q4 2022 Earnings Call Transcript

National Bank Holdings Corporation (NYSE:NBHC) Q4 2022 Earnings Call Transcript January 25, 2023

Operator: 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 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 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.

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 Aldis Birkans, 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 Aldis to cover the quarter and full year in greater detail, as well as share guidance for 2023. Aldis?

Aldis Birkans: All right. Well, thank you, Tim. 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 1 CECL loan loss provision expense of $16.3 million for the Bank of Jackson Hole’s loan portfolio. As Tim shared, excluding these transaction-related items, our adjusted core net income was $34.5 million or $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 or 22% on a linked quarter basis. We’re very pleased with the strong organic loan growth during 2022, and our teammates continue to 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 Hole loans.

In the quarter, 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 look 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 noted, our variable rate loans, annually originated loans reflect the higher rate environment.

The resulting earning asset yield widening was slightly offset 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 beta 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, if it remains strong, our non-accrual ratio improved 3 basis points to 0.23%. Our non-performing asset ratio improved another 4 basis points to 0.28%.

The fourth quarter’s net charge-offs were just 4 basis points annualized and we finished the full year with net charge-offs of just 3 basis points. Both criticized and classified loan ratios also improved quarter-over-quarter. During the quarter, we recorded a provision expense of $21.9 million. And as I mentioned earlier, $16.3 million was driven by the establishment of a Day 1 allowance for credit losses for the Bank of Jackson Hole 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. Billing quarter decrease was primarily driven by the slowdown in 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 a linked 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 million 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 linked 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 are 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 million to $12 million of expense related to unify ecosystem build out.

Inclusive of this strategically important investment, the total non-interest expense is projected to be in the range of $243 million 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 quarter’s 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 book 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 diluted shares outstanding to remain around 38 million shares. And with that, I will turn it back to you.

Tim Laney: Well, thank you, Aldis. We’ve shared a lot of detail with you. So let me ask the operator to open up the call for any questions that you might have.

Operator: Thank you. . We’ll go first to Jeff Rulis with D.A. Davidson.

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Q&A Session

Jeff Rulis: Thanks. Good morning.

Tim Laney: Good morning, Jeff.

Jeff Rulis: On margin, Aldis, just want to make sure I get the — I guess the guide’s at 4% at year end. Does that exclude any accretion in there?

Aldis Birkans: It’s all in, so it includes all of the acquired loan accretion increase and expected increase in our cost of funds given the rate environment. So that’s — but it does exclude any rate changes that Fed may still do here in February or later this year.

Jeff Rulis: Got you. Okay. But is the — I got your message that cost of funds kind of closing out sort of the advantage. Does that still mean — on a core basis, do you think you could scratch out maybe an incremental increase in the first quarter too? I guess absent the Fed moves, is there still hope for maybe incremental increase and then again as that drifts down towards the end of the year?

Aldis Birkans: Yes, I think another way of looking at that is what net interest income will do, right, in terms of dollars more importantly than whether we’re going to grow that. And I think our earning asset yield growth has a good chance of overcoming whatever the margin calculated squeeze there is and we can at minimum I think hold it flat if not adding each quarter.

Jeff Rulis: Okay.

Tim Laney: This is Tim. I would add that, as a reminder, we targeted or expected that margin to drift down closer to 4 or even over the course of the fourth quarter. So we will admit is that we believe we’re taking a conservative view on that glide path. But what we’re not doing is giving up on our loan price discipline. I think the fact that over 80% of our deposit base is represented by core relationship accounts, much of that core operating accounts we think the area where we’re going to need to flex on deposit pricing is on that other 20%. So if you think about areas like CDs that we haven’t really leaned into, our inclination would be to lean in to call it that nine-month plus CD as an area to pick up what we believe are reasonably cost fundings.

And again, I guess the main point here is we’re targeting to have margin compressed by year end as low as 4%. That’s at year end. Obviously, we’re going to be doing everything we can just as we did in the fourth quarter to mitigate that and produce a strong return in that front as we can.

Jeff Rulis: Yes, I hear you, Tim. And I’d say — I guess the upside a pretty big number, so I think relative to expectations that popped on the short end. So maybe just one more on the margin though. Further out, if we can even be that far, but you’re putting anything on in terms of hedges or anything to kind of mitigate asset sensitivity sort of, again, looking at the end of the year? If it does come back to 4, are we thinking about things in ’24 that you want to protect it even further as in try to hold that level? Are you putting anything on balance sheet to try to protect it further out if we do get a shift in rates?

Aldis Birkans: We selectively are actually adding some derivatives and rate floors to ensure that we can lock in as much as possible the margin that we’ve enjoyed here. And it is market dependent, rate dependent and price dependent, obviously, but we’ve throughout 2022 had a few 100 million of rate hedges. Clearly they are, call it, out of money right now. Don’t have any value. But if rates were to reverse, we have some protection and looking to do some more of that in 2023 as well.