Q1 2022 National Bank Holdings Corp Earnings Call
Good morning, everyone and welcome to the National Bank Holdings Corporation 2022 first quarter earnings call. My name is Keith 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'd like to remind you that this conference call will contain forward looking statements, including but not limited to statements regarding company's strategy loans deposits capital net interest income noninterest income margins allowance.
Texas noninterest 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 this date of this call and National Bank Holdings Corporation, or <unk> takes no obligation to update or revise these statements. In addition, this call will reference certain non.
GAAP majors, which National Bank Holdings Corporation believes provides useful information for investors.
Conciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations sections of Www Dot National Bank Holdings Dotcom.
It's now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman, President and CEO , Mr. Tim Laney.
Thank you Keith.
Good morning, and thank you for joining us as we discuss both National Bank Holdings first quarter 2022 financial results and last evening's announced acquisition of Utah based Rock Canyon Bank I'm joined by oldest Burkins, our chief financial officer with respect to the first quarter.
Our focus on small and medium sized businesses operating in great U S markets continued to produce solid results.
Our teams delivered record first quarter annualized loan growth of 15, 8% most important the newer red originations remained granular and diversified in nature.
Working with businesses, whose balance sheets are very strong and well positioned for economic shocks to that end, we ended the quarter with record low nonperforming assets and positive asset quality trends across the board.
Our focus on earning the full relationship of our clients resulted in attractive growth in transaction deposits and Treasury management fees.
We feel very good about our new market share gains and our momentum on that front.
Finally, it's noteworthy that net interest income is well positioned to benefit from rising rates and more broadly we believe our balance sheet is well positioned to avoid major a OCI shocks.
Turning to last evening's announcement on the acquisition of Utah's Rock Canyon Bank. This move accelerates our strategy to expand in the Salt Lake City region. While also adding a best in class SBA program that is scalable across our geographic footprint and to unify.
Rock Canyon is the number one bank originator of SBA loans and the state of Utah, We fully expect to deliver increased fee income from this impressive capability and I do want to take a moment and recognize and thank the Raleigh family for the great Bank that they've built.
And for their willingness to establish this new partnership on an exclusive basis.
When coupled with our recently announced acquisition of the bank of Jackson hole, we have added scalable fee income capabilities and the SBA and wealth management areas, while expanding into some of the most attractive markets in the United States.
On that note I'll turn the call over to all of this for more detail.
Alright, Thank you Tim and good morning, everyone.
I will cover the rock Canyon Bank acquisition deal metrics, and then provide an update in our first quarter's results as well as an update on our full year 2022 guidance.
We are pleased to announce another acquisition in short period of time, we believe the combination of N BH Bank rock hanging back and the previously announced acquisition of bank of Jackson hole results in a highly diversified well capitalized balance sheet and that's multiple additional revenue streams.
Loan production anabolic management business.
With regard to this acquisition Rock Canyon Bank is on the 800 million dollar asset bank that has $500 million in loan balances and $740 million in deposits. They operate in the SaaS growing Salt Lake City and Provo region.
Based on the April 14, 2022, NBA would see stock price of $38 69.
This is a $136 million transaction.
As part of the total consideration N V. H will issue a fixed amount of $3 1 million shares and page $16 $1 million in cash.
<unk> represents approximately one eight times rock Canyon as tangible book value and the result in a two five year tangible book value dilution earn back toward MBA UNC shareholders using the crossover method.
As always we have been realistic and appropriately conservative with our modeling assumptions and we have not built in any additional revenue synergies into our financial modeling.
Now turning to the first quarter's results.
First quarter <unk> earned net income of $18 4 million or <unk> 60 of earnings per diluted share.
We grew our loan book, a strong 15, 8% annualized which is always was led by growth in our commercial loan book of 19, 7%.
During the first quarter, we grew our average transaction deposit balances by four 9% annualized and continued to maintain diligent expense control with total non interest expense decreasing by zero point $4 million on a linked quarter basis.
As we discussed during our last earnings call. We entered the year with strong loan pipelines. This clearly contributed to a record first quarter loan fundings and the second highest quarter of loan production in our company's history.
During the quarter, we funded $419 $7 million in loans and we have funded nearly $1 7 billion in loans over the past four quarters.
Further our pipelines remain strong.
Looking ahead, while multiple geopolitical and inflationary uncertainties could weigh on the U S economy we.
We feel comfortable with our prior loan growth guidance of 10% to 12% for the full year.
Furthermore, at this point, we see enough momentum to deliver or even beat the high end of this range.
The first quarter's fully taxable equivalent net interest margin was two 9%.
The fully taxable equivalent net interest income was $48 million as all material Pvp fee impact was already realized last year.
And while the impact of March's 25 basis point increase in the federal funds rate had a nominal impact on our first quarter results.
As Tim mentioned N Bhg's net interest income will benefit nicely from this and any further short term interest rate increases in the coming quarters.
Going forward, we project net interest margin to expand to 3% in the second quarter of this year and the retained positive trends in the following quarters.
In terms of our asset quality remains strong with positive trends across the board.
First quarter's net charge offs were just five basis points annualized nonperforming assets decreased another four basis points and non accrual loans remained at record low 24 basis points of total loans.
The strong asset quality, along with our current credit outlook resulted in a $322000 loan loss allowance release this quarter.
The resulting allowance to total loans at quarter end was 1.0% to 4%.
Total first quarter noninterest income was $19 1 million Boe.
Both service charges and bankcard income were up nicely and increased three 8% on.
On a year over year basis, the first quarter is seasonally slow for these line items, but we continue to experience nice growth on year over year basis.
Mortgage income was clearly impacted by the rapid increase in mortgage rates, having said that when breaking down our mortgage revenues between volume and rate. It's notable that our lock volume during the first quarter was 6% higher than during the fourth quarter of last year.
On the other hand, the margin compression resulted in a $721000 decrease in our mortgage revenues on a linked quarter basis.
Looking ahead for the full year 2020 to be our adjusting our fee income guidance to <unk> $78 million to $82 million.
The decrease from the prior guidance is entirely due to the impact of higher mortgage rates, probably having another mortgage revenues.
We expect net interest income expansion and expense control to mitigate this decline.
Turning to expenses.
Non interest expense this quarter was $44 1 million a reduction of $423000 from the prior quarter.
This was a clean quarter, four or quarter expense run rates and a decrease in the compensation line was mainly due to fewer fewer payroll days during the quarter.
For full year 2022, we are lowering our guidance for non <unk> non interest expense to be in the range of $183 million to $187 million.
This guidance is for our core operations and does not include M&A related transaction costs, which as a reminder between the two deals are.
Are projected to be approximately $23 $5 million on pre tax basis.
During the first quarter of 2022, we incurred approximately $250000 in transaction related costs.
Our capital ratios continued to remain strong at 10, 5% tier one leverage ratio and 13, 9% CET one ratio as of the quarter end.
Pro forma basis for the two announced M&A transactions, we will continue to maintain strong 9% tier one leverage ratio and 12% CET, one ratio still providing us with plenty of optionality.
With that I will turn it back to you. Thank you all of this we clearly believe the acquisitions of rock Canyon and bank of Jackson hole represent attractive uses of excess capital. My expectation is that we will enhance our operating leverage while also growing new diverse revenue streams and attractive low cost deposit.
Basis will remain focused on expanding in fast growing and strategically important markets, while adding capabilities that will be leveraged across our geographic and to unify platforms and on that note Keith I'll stop and ask you to open up the lines for questions. Thank you.
Ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to lay your CMO to reach our equipment again. Please press star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
Okay.
Yeah.
We'll take our first question from Brett.
Excuse me sorry for Rev Rec.
He's my tongue tied a Brett Rapkay rabbit team from <unk> Group. Please go ahead.
Hey, guys good morning.
Good morning.
Congrats on another deal two questions around the transaction. One obviously you know the only the other deal is a big opportunity on the trust and asset management side in this one.
Is from a fee income perspective, with SBA and it looks like they did $12 million of fee income last year can you maybe quantify the S. P. I S. P. A.
Opportunity you know as you see it being placed on.
Your footprint or your operations and then can you talk about their loan portfolio yield, which I think is about 7%. So it's obviously a little higher yielding portfolio.
Yeah I'll take the second the second part first so yes their portfolio is yielding nicely near a 7% they've been able to maintain it through this extremely low rate environment. So.
This is one of the things we like about it there is best practices to be learned from that group.
They've been able to maintain it as recently as the last quarter. This quarters as far as we can tell in terms of production levels. So.
Those are nice yields in terms of the SBA loan production they.
Originate near $200 million.
And SBA production a year.
It would be nice supplement to what we already do too.
I'll call it $1 7 billion dollar loan production over the last four quarters for us, but what we are excited about visibility too.
The transition as Tim mentioned, the best practices that we see in their business across our footprint, yeah, but I would add that the way I think about it and where we're not ready to provide guidance around what we expect this to scale too.
Geographically and ultimately to unify Brett, but what I would tell you is that we have a strong SBA business at National Bank Holdings focused on what I would say the more complex.
SBA transactions, what what we are so very impressed with it at rock Canyon banking. It's the reason they are the number one bank SBA lender in the state of Utah is they've really defined a very efficient process for addressing.
Small medium sized business.
<unk> law needs and again speed is a key here, but we've been very impressed with the quality of the administration and the underwriting around that work. So we actually believe it will add an alternative stream and an alternative process for FERC.
Or kind of standard SBA business opportunities.
Okay, and just going back all of this on the loan portfolio yield I mean look at the regulatory filing stuffing stands out what is is S. P. A a big chunk of the 7% performance on the yield or are there other things weighing in on that.
It's across the board it they have some.
They have SBA they have CNI.
Sorry.
All parts of the portfolio are let's just say accretive to our yields.
Okay.
The guidance for expenses you you added color there on the end about the expenses for these deals does the fee income of $78 million to $82 million that guidance does that exclude or include.
The transactions closing later this year.
It excludes so my guidance is purely on NBA C alone basis.
We certainly will look to close and integrate these deals as quickly as we can.
But until we have more clarity on through all regulatory.
<unk> will hold off on how much those deals will contribute this year, but I did want to provide the expense given that's likely to hit.
The transaction costs will hit this year.
And with that 78 to 82 would seem like you're implying that the mortgage.
Recovers.
Throughout the year in terms of revenues is that a fair assumption to make relative to the first quarter.
Yeah. So I think the way I would look at it is.
We are projecting the mortgage revenues to be for next couple of quarters.
In line with the first quarter, and then half seasonal slowdown in the fourth.
Okay, and then a last quick one and I'll, let somebody else jump in the tax rate. This quarter, obviously lower can you talk about the sustainability of the tax rate or any thoughts around it around that going forward yes.
Just given the work by the quarter relative to the prior quarter came in tax rate came down.
I would put it closer to 17% to 18% at this point in the full year.
But will impact net income and taxable income will be it will be these transaction costs, which is partly also reason why first quarter has been lower.
We are starting to project that.
Auction costs hitting this year's taxable income and Brett I would remind you as it relates to any step down in mortgage related revenue. We've always viewed the mortgage business is a nice hedge to our commercial banking business and we're certainly seeing volume ramp up in commercial therefore.
We expect the net interest income.
10 year to grow and would expect there to be some some nice offset over the course of the year. So more to come on that front, but that's the way we've always looked at those two businesses and how they operate in a complementary fashion.
Okay. Thanks, I appreciate all the color.
You bet man.
We will take our next question from Andrew Leisch with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Great Congrats on another deal here too.
Question on the loan growth that rock Canyon has been putting up it looks like it's been pretty strong curious how much of that was from PPP. How much is it from retaining SBA loans.
Are they selling all of the guaranteed portion are there or are they retaining some of it just trying to get a sense of.
What growth could possibly be here from the acquired franchise going forward.
Yeah.
The answer is kind of a combination of all above their PPP presence wasn't in terms of on balance sheet growth Doug material.
For example, they had all of our PPP loans gone as of year end.
In terms of historical growth yesterday have been solid double digit growers on both sides of the balance sheet is actually not just not just loans and deposits and the way we looked at it.
We took it down to more about my guided 2020 to put MBA age, 10% to 12% levels to be conservative back to being conservative on our assumptions.
That's how we model them going forward.
Got it okay.
Then.
How does this affect your asset sensitivity. It seems like this with all the liquidity that they have to bake a N V H, even more asset sensitive.
He does a fair assumption, yes, they they are sitting on $300 million of cash, but no liquidity.
No investment portfolio.
Cash is clearly going to provide a lot of asset sensitivity in a lot of opportunity for us in these higher rates as well so.
So that's something that would be like and frankly again, not not modeled in any way shape or form in our EPS accretion assumptions.
Got it Okay, and then just on the deposit base it looks like there's been some jumbo Cds and brokered deposits.
Any.
As discussed on the makeup of that do you intend to run those off just given that the rest of it is.
Pretty low cost funding and very core.
Yeah exactly so.
That is more of them.
I'll call it wholesale type of deposit inherited from from years before that they have such as broker deposits. Yeah that is planned to be around often.
We're not going to.
Institute on that front, we'll have a very disciplined approach to the way we've had it on our relationship building on deposit side with our clients.
Retaining core.
Core deposits.
Got it very helpful.
Those are my questions I'll step back thank you.
Thanks, Andrew.
We will take our next question from Jeff <unk> with D. A Davidson. Please go ahead.
Good morning.
Hey, good morning.
So you know clearly there's a common thread with these last couple of deals on the.
On the diversity of the fee income side and you.
You know I guess strategically just trying to think about the opportunity.
Not only retain.
These banks do well they've got both.
You've talked about how.
Yeah, you could extend that to your legacy platform. So maybe just and this maybe oversimplifying, but if the bank is call it.
25% of revenues or fee income and it kind of a normalized.
Mortgage environment.
Is there a way to kind of talk about what these bags due to you in the short term.
They are closed in early parts of well later this year early next year, what that target of fee income to revenue would be and then and then fully flex what that could be again apologize that's oversimplifying, but just trying to get a sense for.
You're retaining the business of what you buy but as you extended your platform what could it be as well.
Look you're at you're asking the perfect question, we're just not at a point, where we're comfortable providing guidance.
But the framework that you're using to think about where this could go is exactly where our heads are at and we.
We have no doubt that both capabilities, but the wealth management in this particular SBA capability are going to two very quickly contribute across the rest of our franchise that will be a focus I would also say, we should not lose sight of the fab.
This puts us an incredibly attractive markets you know, whether we're talking about the wealth market of Jackson hole, the growth market or Boise or the expansion.
In Salt Lake City, and the Wasatch region. It's.
I would tell you we believe we've been as we always are.
Relatively.
Conservative in our outlook for what these these two great banks will bring to N B H.
Okay. So I appreciate it that's a long way of saying we're on the same page and we will be coming back to you with guidance in an appropriate timeframe.
Makes sense okay.
Well on the deal all this just kind of housekeeping.
Got the earn back on tangible book just backing into that.
Do you have both the tangible book dilution as a percent.
What would the seasonal double counted back for this transaction would be.
Yeah. So.
The.
Day, one dilution is.
4% on our tangible book.
That model as of December 31st.
Jump off point.
Last year.
In terms of double counting right now what we are assuming that the double count.
Is equal to non P. C D Mark.
Okay, and maybe a last one this is more broader.
Yeah. Thanks, you've touched on before all of this in the past that that margin is.
Maybe we get to 3%.
In the second quarter.
What do you think that figure equate you touched on.
You know liquidity weighing on that margin by a certain basis.
Is it.
If fully balanced it I know that Thats hypotheticals, but you have a big year that if you were to rightsize.
The balance sheet what that margin.
How much under water as that.
You bet.
Liquidity, Thanks, Yep Yep, so if.
And the right sizing there could be two ways right you could add loans in.
And increase the interest income or you could call it to take out the cash and reduce cash reducing cash as the more conservative look at looking at it but right now in the first quarter. For example, it's around 30 basis point compression impact from from cash next quarter.
When we.
We report, 3%, let's say.
Which were projecting the cash projection impact still is around 26 27 basis points. So you know the our core margin would be three and a quarter to $3 30.
<unk> cash ex of excess liquidity.
That helps great.
Yes that does that's exactly what I was looking for it so thank you.
Hey, Jeff you know you were asking a bit tangible book dilution or use of tangible book here as we look at a number of banks reporting 10, 15% hits to their tangible book as a result of a OCI, we feel pretty good about the use of Av.
<unk> capital here, particularly when you think about the accretion of earnings that we're picking up then feel reasonably confident that this two and a half year kind of earn back we're targeting is something that will will be but.
It's interesting times to be thinking about deploying capital in this manner versus seen it run down on something like an Aoc I hit.
Yeah good point.
I just missed it.
To be more specific on tangible book value dilution. They want it's a four 6% to be precise.
Got it.
We will take our next question from Kelly Motta with K B W. Please go ahead.
Hey have you tend to know that's good morning, congrats on the deal.
Kelly maybe.
Just sticking with capital.
With the two deals pending is it fair to say that you'll be.
Out of the market for buyback for.
The remainder of the air at least while they are pending or do you have any.
Our stock plans in place to the low teens.
Yeah.
Our on time.
I'll simply say that is not fair to say.
Got it.
Okay. That's that's helpful. And then just circling back to the fee income guidance.
I know a lot.
The difference is it's just what's going on with the mortgage market I don't believe you had.
Mike.
By way of bad to Unifi.
He is coming in this year, but just wanted to confirm that and also.
Yes, it's fun.
But you don't feel like they are.
It's a nice diversification that you can export <unk> to buy if the pending transaction to change kind of your thoughts or timeline at all and in terms of importance.
Hi.
We really we really think at this point.
2022.
The likelihood of seeing incremental contribution would come out of the Vince drove partnership and investment which will be a capability within to unify but we do not expect to have enough of the framework in place with to unify.
Sure enough time in terms of having to close these two transactions in 'twenty two to see a convergence of those capabilities in in this year.
Certainly over time.
Both of those capabilities and our need for those capabilities, where strategic drivers of the acquisitions.
And I'll add on the.
To be fair on the other side of the income statement on expenses, we haven't had a whole lot of east unified expense start hitting the just yet either so if you look at the projection.
It does imply a bit of a ramp up on a quarterly run rate basis.
A portion of that is based on not to unify build out expense that I guided at the beginning of the year.
Got it.
Okay. That's helpful and then and then turning to the man.
You kind of help with that cash.
Component.
In the earlier question, but just wondering what that three or any how much of I'm sorry, the 3% how much of that is.
Related to that the rate hike, we had and if you are building out any any further rate increases in Q T. He is that how big that number.
No.
Historically have done is we.
We deal with information that we know.
And not putting any forecast their daughter, and even expected rate hikes or for that matter of rate cuts when we do our projections. So it is true.
Impact from the loan growth.
Alright, so I would not dismiss the loan growth our loan growth this quarter this last quarter.
While it extremely solid came in a little bit later in the quarter and it didn't have a whole lot of benefit.
In the first quarters net interest income which is hum.
Just to put that in perspective for example, if our average balances for loan balances grew only 37 million. If you look at our spot balances netting all of the thing out be jumping off at $161 million higher than the prior quarters. So there's 120 call it $120 million.
<unk>.
Earning asset balance day, one in second quarter that is earning.
Quite a bit more.
Interest income and then certainly the rate increase I'm estimating about.
Given there was late in the quarter again March 16th increase.
Benefited about two maybe three basis points.
We generated loan yield.
In the first quarter I think we have about five to six basis points pickup and again the originated loan yield from.
From that in the second quarter.
Great.
Super helpful. Thanks, All decking and thanks, Tim I appreciate it you bet that Kelly thanks for the questions.
Yeah.
We'll take our next question from Andrew Terrell with Stephens. Please go ahead.
Hey, good morning, I'm wondering if that's on the deal.
Andrew Good morning.
Maybe just first kind of a quick question on acquisition.
With both of these kind of in the fold, especially if you close before the end of 2022, and just given kind of some of the growth I. It seems like you'll be pretty close to that $10 billion Mark in total assets I was hoping you had kind of the the durbin impact for the pro forma company, if you could disclose it.
We do yes.
So in terms of individual deal accretion numbers that we put into the two decks.
They are viewed on standalone basis, and we certainly don't triggered a $10 billion Mark nor do we do on a pro forma basis, just yet so.
And there is a time delay obviously in terms of when the Durbin impact kicks in.
<unk> said that our estimate is on a pro forma basis on pro forma revenue basis Durbin impact is only going to be about two percentage points of our total revenues once once we crossed $10 billion.
Okay got.
Got it I appreciate it.
And all of this I wanted to clarify I think last quarter. When we discuss the expense guidance. It was exclusive of $4 million to $5 million in build out costs related to unify but it sounds like just a minute ago. The expense guidance. The updated guidance for 183 to 187 for this year.
Included those costs did I hear that correctly.
The second part you did in the last year sorry.
Last quarter when I guided for full year. It also included so both of those are.
My prior guidance to this guidance is apples to apples reduction in and both include.
The unified build out costs.
Understood Okay.
And then.
I hear you on all of the the loan growth commentary it sounds it sounds very strong I was hoping you could speak to maybe how youre thinking about growth on the other side of the balance sheet, just from an organic standpoint and within the deposit book.
Well I think.
Our model serves us extraordinarily well with a focus on small and medium sized business. It's so critical to have bankers that are rewarded and focused on capturing the full relationship of our clients and having the treasury management capabilities.
Allow us to compete with the majors is it's been a huge differentiator and so we'll continue to watch our low cost transaction deposit relationships grow and would that growth, we're talking about very sticky low cost attractive funding for.
The bank is aldis pointed out earlier, we've never been reliant on wholesale funding.
It's not something we are.
The ever expect to have to do and certainly with acquisitions like this delivering very attractive low cost deposit base basis. It just puts us in a room to take very nice attractive low cost liquidity and.
Put it to work so.
I think that trap as we've discussed before that.
Bank leadership teams to fall into is simply looking at the kind of stimulus related balances that are sitting on a lot of balance sheets and get complacent I think what you've really got to do is be measuring new relationship activity are you taking market share are you capturing the full.
Relationships are those clients when you do that I think it positions you well for the future.
That's very helpful. I appreciate it and if I could just sneak one one last one and I saw that the bond book was built a little bit. This past quarter, you still have a fair amount of excess liquidity on the balance sheet and I know both of the announced acquisitions.
<unk>.
Improve that kind of excess liquidity position did the two announced deals and just given that fact I guess.
Lead you to be more inclined to put the money to work in the bond book in future quarters or should we think about the bond book is kind of static from here. Thanks.
Great question and that's a great question I think it all depends in certainly the yield curve back backing up to the point, where it is it starts it starts becoming more attractive, especially if you start thinking.
And believing the.
Stagflation or.
Slowdown in the U S economy, and you start thinking as the rates are going long term, it's going to go much more higher so we will be optimistic I would say I think without these two transactions less so with these two transactions coming onto our books and knowing that we will receive that cash balance.
Balances of each one of them we might be Mike.
A free invest let's say some of that their cash on our balance sheet and then absorbed our cash.
Replacement in terms of our liquidity on day, one if that makes sense.
Yep.
And that makes it makes total sense I. Appreciate you guys are both taking my questions and congrats on another deal.
Thank you very much.
And thank you I am showing we have no further questions at this time I will turn the call back to Mr. Laney for his closing remarks.
Great. Thank you very much.
I do want to thank everyone that joined us today.
We are clearly pleased.
It could be at a point in the year, where we've announced two incredibly attractive acquisitions, great New partners, great. New teams look forward to working with our new teammates. We appreciate all the questions. This morning wish everyone. A good day and a good rest of the week. Thank you.
And this concludes today's conference if he would like to listen to the telephone replay of this call. It will be available beginning in approximately four hours and will run through April 24th 2022 by dialing 8882.
031112, and referencing passcode 2525902.
The earnings release, and an online replay of this call will also be available on the company's website on the Investor Relations page. Thank you very much and have a great day you may now disconnect.
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