Q2 2022 National Bank Holdings Corp Earnings Call

Speaker 1: You You

Speaker 2: Good morning, everyone, and welcome to the National Bank Holdings Corporation 2022 Second Quarter Earnings Call. My name is Kyle, 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.

Good morning, everyone and welcome to the National Bank Holdings Corporation, 2022nd quarter earnings call.

My name is Kyle and I will be a conference operator for today.

At this time all participants are in a listen only mode. We.

We will conduct a question and answer session. Following the prepared remarks.

As a reminder, this conference is being recorded 40 people places.

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.

Speaker 2: As a reminder, this conference has been recorded for replay purposes.

Speaker 2: I would like to remind you that this conference call will contain four looking statements, including but not limited to statements regarding the company strategy, loans deposit, capital, non-interest income, non-interest income, margins, allowance, access and non-interest expense.

Because the capital net interest income non interest income margin, allowing 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 degree and Exchange Commission.

Speaker 2: Actual results could differ materially from those discussed today.

Speaker 2: These forlooking statements are subject to risk, uncertainties and other factors, which are disclosed in more detail in the company's most recent filings, with the U.S. Secreties and Exchange Commission.

These statements speaks only as of the date of this call and National Bank Holdings Corporation undertakes no obligation to update or revise these statements.

Speaker 2: This statement speaks only as a update 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 provide useful information for investors. The consolidation of this non- GAAP financial measures to the CAP measures are provided in the news release posted on the investor relations section of...

In addition, the call today will reference certain non-GAAP measures, which National Bank Holdings Corporation believes robot units for information for investors.

Consideration of these non-GAAP financial measures kept measures are provided in the news release is posted on the Investor Relations section of Www Dot and National Bank Holdings Dot 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, sir thanks.

Speaker 3: www.nationalbankholdings.com. It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation Chairman, President, and CEO , Mr. Tim Lanny. Please go ahead, sir. Thanks, Kyle. Good morning and thank you for joining us as we discuss National Bank Holdings' second quarter 2022 financial results. I'm joined by Aldis Perkins, our Chief Financial Officer.

Thanks <unk>.

Good morning, and thank you for joining us as we discuss National Bank Holdings second quarter 2022 financial results.

Joint bought oldest Bergen sour Chief financial Officer and.

And our focus on small and medium sized businesses operating in high performing U S markets continues to produce solid results.

Speaker 3: And our focus on small and medium-sized businesses operating in high-performing U.S. markets continues to produce solid results. The U.S. markets continues to produce solid results.

Our teams delivered another record quarter of loan fundings driving annualized loan growth of 12, 3%.

Speaker 3: Our teams delivered another record quarter of long fundings driving annualized long growth of 12.3 percent.

We remain prudent in our underwriting we continue to work with businesses, whose balance sheets are very strong and well positioned for economic shocks.

Speaker 3: We remain prudent in our underwriting.

Speaker 3: We continue to work with businesses whose balance sheets are very strong and well positioned for economic shocks. To that end, we ended the quarter with record low non-performing assets and positive asset quality trends across the board.

To that end, we ended the quarter with record low nonperforming assets and positive asset quality trends across the board.

Furthermore, if we took the cumulative losses the cumulative losses from our recent stress tests using assumptions consistent with the severely adverse scenario used in the 2022 DFAST, we would operate with a tier one leverage ratio of approximately.

Speaker 3: Furthermore, if we took the cumulative losses from our recent stress test using assumptions consistent with the severely adverse scenario used in the 2022 DFAS, we would operate with a tier 1 leverage ratio of approximately 9%.

9%.

Our focus on earning the full relationship of our clients resulted in attractive growth and transaction deposits and Treasury management fees I'll.

Speaker 3: Our focus on earning the full relationship of our clients resulted in attractive growth in transaction deposits and treasury management fees.

I'll add that we feel very good about our new market share gains and our momentum on that front.

Speaker 3: I'll add that we feel very good about our new market share gains and our momentum on that front. We're making solid progress on our regulatory approvals having just received approval from the Federal Reserve for Rock Canyon Bank and we remain on track for approval of the Bank of Jackson Hole acquisition.

We're making solid progress on our regulatory approvals, having just received approval from the Federal Reserve for Rock Canyon Bank and we remain on track for approval of the bank of Jackson hole acquisition.

The more time, we spend with these two banks and their teams the more optimistic I am about their imminent contributions to our financial performance and on that note I'll turn the call over to all of this burkins oldest alright, thanks, Tim and good morning.

Speaker 3: The more time we spend with these two banks and their teams, the more optimistic I am about their imminent contributions to our financial performance. And on that note, I'll turn the call over to Aldous Berkins. Aldous? All right, thanks, Tim. Good morning. Thank you for joining our earnings call this quarter.

Thank you for joining our earnings call this quarter.

For the second quarter 2022, we reported net earnings of $24 million or 67 cents per diluted share.

Speaker 3: On the second quarter of 2022, we reported net earnings of $20.4 million or 67 cents per yang bro.

Our bankers delivered another quarter of solid loan growth our expenses continued to be well managed and the credit quality remain exceptionally strong.

Speaker 3: Our bankers deliver another quarter of solid long growth. Our expenses continue to be well managed in the credit quality to main excessively

Closing and integration of our two previously announced bank acquisitions remains on track.

And on the related note during the quarter, we realized $1 million in M&A related costs.

Speaker 4: The closing and integration of our two previous we announced back our positions. And interact.

Speaker 4: And on the related note, during the quarter, you'd realize $1 million in mn8 related costs.

During the quarter, we funded $492 $5 million in loan originations, which was another quarterly record and as a result, the loan portfolio grew a solid 12, 3% annualized.

Speaker 4: During the quarter, we funded $492.5 million in loan originations.

Speaker 4: which was another quarterly record, and as a result, the loan portfolio grew a solid 12.3% annualized.

As we have discussed on our prior earnings calls we benefit from operating in markets that continue to outperform the national economic metrics on many fronts.

Speaker 4: As we have discussed in our prior earnings calls, we benefit from operating in markets that continue to outperform the national economic metrics on many fronts.

And while high inflation and rapidly rising interest rates will impact many aspects of the economy. We are pleased with our new relationship pipeline activity as we enter the second half of 2022.

Speaker 4: Involved high inflation and rapidly rising interest rates will impact many aspects of the economy, we are pleased with our new relationship pipeline activity as we enter the second half of 2022. The economy has been rising and we are pleased with our new relationship pipeline activity as we enter the second half of 2022.

We also entered this rate cycle with an acid test the balance sheet and the increasing interest rates benefited net interest margin nicely during the second quarter.

Speaker 4: We also entered the straight cycle with an acid-tested balance sheet, and the increasing interest rates benefited, and that interest margin nicely during the second quarter. The increase in interest rates benefited, and that interest margin nicely during the second quarter.

The quarter's fully taxable equivalent net interest margin was 338% or a 48 basis point increase from the prior quarter.

Speaker 4: The quarter's fully taxable equivalent net interest margin was 3.38%, or a 48 basis point increase from the prior quarter.

Approximately 13 basis points of this increase was driven by accelerated income from an early pay off often acquire law.

Speaker 4: Approximately 13 basis points of this increase.

And the rest was driven by the balance sheet has attested positioning.

Speaker 4: was driven by accelerated income from an early payoff off an acquired law. In the rest, we'll driven by the balance sheet assets and stipuli heron solution.

The total cost of deposits decreased two record low 16 basis points.

Looking ahead for the second half of 2020 to be project N V. H as net interest margin to be in that three four to three 5% range.

Speaker 4: The toll cost of the deposit decreased to record low 16 basis points.

Speaker 4: Looking ahead for the second half of 2022, we project NBH's net interest margin to be in the 3.4, the 3.5% range. The net interest margin is in the 3.4, the 3.5% range.

In terms of our asset quality remains strong with positive trends across the board.

The second quarter's net charge offs were just three basis points annualized.

Speaker 4: In terms of autochthon quality, it remains strong with positive trends across the board.

And both the nonperforming asset ratio and the NPL ratio decreased another four basis points this quarter.

Speaker 4: The second quarter's net charge-offs were just three basis points annualized.

Speaker 4: And both the non-performing acid ratio and the NPL ratio decreased another four basis points this quarter.

Looking ahead and fully recognizing the increase the rest of the U S economy, our seasonal credit allowance reserve increase from 1.0% to 4% of total loans at the end of the first quarter to 1.06% at the end of the second quarter.

Speaker 4: Looking ahead and fully recognizing the increased risks to the U.S. economy, our CECL credit allowance reserve increased from 1.04 percent of total loans at the end of the first quarter to 1.06 percent at the end of the second quarter.

The resulting second quarters provision expense was $2 5 million.

Total second quarter's noninterest income was $16 8 million or a $2 3 million decrease from the first quarter.

Speaker 4: The resulting second quarters provision expense was $2.5 million.

Speaker 4: Total second quarter's non-interest income was $16.8 million or a $2.3 million decrease on the first quarter.

The linked quarter decrease was entirely due to lower residential mortgage income is the rapidly rising mortgage rates materially slow down mortgage volumes.

Speaker 4: The link-order decrease was entirely due to lower residential mortgage income as the rapidly rising mortgage rates materially slowed down mortgage volumes.

Additionally, this quarter, we selectively retain a higher portion of mortgage loans in our portfolio.

Our client engagement for both consumer spending and business account activity was strong and total service charges grew 26, 6% annualized on a linked quarter basis.

Speaker 4: Additionally, this quarter will be selectively retained a high portion of mortgage loans in our portfolio.

Speaker 4: Our client engagement for both consumer spending and business account activity was strong, and total service charges grew 26.6% annualized on the link-order basis.

Similarly told bank card revenues grew 47% annualized on a linked quarter basis.

Speaker 4: Similarly, told bank hardware revenues grew 40.7% annualized on the link or basis.

Looking ahead for the second half of 2022, we are projecting our total fee income to be in the $30 million to $32 million range.

Speaker 4: Looking ahead for the second half of 2022, we are projecting our total fee income to be in the $30 to $32 million range.

Noninterest expense totaled $45 6 million and included approximately $1 million of acquisition related costs.

Speaker 4: Non-interest expense totaled $45.6 million and included approximately $1 million of acquisition-related costs.

Excluding these acquisition related expenses the core bank expense run rate was relatively flat with the first quarter and reflects our continued expense management efforts.

Speaker 4: excluding these acquisition related expenses, the core bank expense run rate was relatively flat with the first quarter and reflects our continued expand management efforts. and reflects our continued expand management efforts.

For the second half of 2020 to be our projecting noninterest expense to be in the range of $92 million to $95 million to.

Speaker 4: For the second half of 2022, we are projecting non-interest expense to be in the range of 92 to 95 million dollars.

To be clear these projections exclude M&A related costs.

Finally, our capital ratios remain strong at $13 seven 5% common equity tier one ratio and $9, 99% tangible common equity.

Speaker 4: To be clear, these projections exclude M&A related costs.

Speaker 4: Finally, our catheter ratios remain strong at 13.75% common equity tier one ratio in 9.99% tangible common equity.

As I already mentioned, our two M&A deals remain on track.

As we have been working with our future teammates throughout the summer we are becoming increasingly optimistic about the strategic and financial benefits of these deals and we look forward to providing more guidance on these transactions in the coming quarters.

Speaker 4: As I already mentioned, our two M&A deals remain on track. As we have been working with our future teammates throughout the summer, we are becoming increasingly optimistic about the strategic and financial benefits of these deals, and we look forward to providing more guidance on these transactions in the coming quarters.

With that I will turn it back to you. Thanks al.

I like our momentum as we enter the third quarter were prudently growing our company and we're well prepared for a broad array of economic scenarios. My expectation is that we'll continue to enhance our operating leverage while also growing diverse new revenue streams and an attractive low cost deposit base.

Speaker 3: Tim, with that I will turn it back to you. Hey, thanks Aldis. I like our momentum as we enter the third quarter. We're prudently growing our company and we're well prepared for a broad array of economic scenarios. My expectation is that we'll continue to enhance our operating leverage while also growing diverse new revenue streams and an attractive low-cost deposit base.

It's also noteworthy that our balance sheet is well positioned to avoid any major a OCI shocks. We remained focus on maintaining a fortress balance sheet, while also adding capabilities that will be leveraged across our geographic and to unify platforms, we're committed to deliver.

Speaker 3: It's also noteworthy that our balance sheet is well positioned to avoid any major AOC eye shocks. We remain focused on maintaining a fortress balance sheet while also adding capabilities will be leveraged across our geographic and to unified platforms.

Solid results today, while also building for the future and on that note call I'll ask you to open up the lines for questions.

Speaker 3: We're committed to delivering solid results today while also building for the future. And on that note, Kyle, I'll ask you to open up the line for questions. We're committed to opening up the line for questions.

Certainly.

Ladies and gentlemen, if you would like to ask a question. Please seek number by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure your mute function to allow you'll seek not to reach our equipment.

Speaker 2: Certainly, Ladies and Gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speaker phone, please make sure your mid function is turned off to allow your signal to reach out equipment. A voice prompt on the phone line will indicate when your line is open. Please state your name before folding your phone. Again, press star 1 to ask a question.

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Your line is open.

I mean before posing your question again, Chris.

To ask a question.

It was just for a moment to allow everyone an opportunity to signal.

Speaker 2: because just for a moment to allow everyone an opportunity to sit down.

We take one question from Jeff really deep.

H Davidson your line is open. Please go ahead.

Speaker 2: We take our first question from Jeff Ruilis with D8 Devison. Your line is open. Please go ahead.

Good morning.

Good morning, Tim and Aldis.

Speaker 5: Good morning.

Good morning.

Speaker 6: Good morning, Tim and Alvis.

The question on the <unk>.

Wanted to get a sense for the deposit kind of behaviors of the customers with with some of the runoff any any idea on when you get the sense that this group was sort of the more of the rate chasing group, where there's a notable by segment.

Speaker 6: A question on the, just wanted to get a sense for the deposit behavior, some of the customers, with some of the runoff. Any idea on, do you get the sense that this group was sort of the more of the rate chasing group, or there was some notable buy segment depositors that may have exited? Any comment on kind of the deposit balance change in the quarter?

Depositors that may have exited any any comment on kind of the deposit balance change linked quarter.

Yeah, you bet I think what you need to focus on is the division of what we would consider to be operating accounts versus time deposits. We actually had core growth in our operating accounts or what we refer to as transaction deposits. We remain very focused on whether we're net growing new relay.

Speaker 3: Yeah, you bet. I think what you need to focus on is the division of what we would consider to be operating accounts versus time deposits. We actually had core growth in our operating accounts or what we refer to as transaction deposits. We remain very focused on whether we're net growing new relationships, new depository relationships, and feel good on that front. So I would tell you we've been comfortable with letting some of the rate chasers on.

<unk> chips, new depository relationships and feel good on that front. So I would tell you we've been comfortable with letting some of the rate chasers on Cds time related deposits move on then.

Frankly, I feel good about the growth in our core to true relationship accounts, and then I'll throw it.

All of this for any other detail, yes, Jeff.

Obviously on an average basis, if you look at we grew.

Our average deposit balance of $61 million, a linked quarter basis $92 million in transaction deposits, so really what contributes to the earning asset funding component as well.

We did quite well in terms of averages growing what we saw was.

Speaker 4: contributes to the earning asset funding component is, it did quite well in terms of averages growing. What we saw was kind of, F's and flows through two quarter spot balances in between, but as Tim mentioned, no loss of clients, no loss of real relationships. So, again, the focus isn't growing for in balance or for some average.

Ebbs and flows through to quarter spot balances in between but as Tim mentioned, no loss of clients and a loss of <unk>.

Our relationship so.

Again, the focus isn't growing quarter and balances on average.

All right.

Like you said the period end transaction deposits linked quarter.

Speaker 6: Yep, all this on front of.

So you're saying that's more of a timing issue that then really we could track. The average number that was up but do you think that was just a fluctuation timing wise.

Speaker 6: like you said, the period end transaction deposits link quarter. So you're saying that's more of a timing issue than really, you know, we can track the average number that was up. Um, but do you think that was just a fluctuation timing wise?

That is correctly as we obviously quite a bit of time analyzing and looking at a 10.

Not seeing any.

Speaker 4: That's correct. As we obviously spent quite a bit of time analyzing and looking at it and not seeing any count losses even, it's more of a balance system.

<unk> losses, even.

More of our balances.

<unk>.

Business client accounts and I'll stress again, we've never focused on Cds time deposit business.

Speaker 3: business client accounts. And I'll stress again, we've never focused on CDs, time-to-posit business. Our focus is on core transactional relationships and strategically feel good about where we're continuing to move on that front. And it ties directly to the other comments we made on broader market share gains. Our focus is on earning the full relationship with clients. That means as we're bringing on new small medium size businesses or individuals.

Our focus is on core transactional relationships and strategically feel good about where we're continuing to move on that front and it ties directly to the other comments, we made on broader market share gains our focus is on earning the full relationship with clients that man says, we're bringing on new small.

Medium sized businesses or individuals.

We're expecting to certainly capture the depository relationship.

On that core deposit or are you seeing any.

Speaker 3: we're expecting to certainly capture the depository relationship.

I guess, what you see and what you see in market.

Speaker 6: On that core deposit, or are you seeing any, I guess what you see and what you see in market is do you see any initial moves on in a kind of rate adjustments? Do you think that, well, so it's two questions within your own book of core customers that you do wanna keep, are you seeing any pressure on pricing and then are you seeing anything in the market that's been irrational to date?

Do you see any.

Initial moves on.

And our kind of rate adjust.

Adjustments do you think that well so two questions within your own book of core customers that you do want to keep are you seeing any pressure on pricing.

Are you seeing anything in the market.

Been a rational to date.

I mean, the board the bulk of keep in mind the bulk of our focus is small medium sized businesses, we're capturing operating accounts and and.

Speaker 3: I mean, the bulk of keeping mind, the bulk of our focus is small, medium-sized businesses we're capturing operating accounts. And, you know, we've seen, in some cases, some discussion around earnings credit rate pressure, but it's been nominal. On the individual side of the business or personal banking, you're always gonna have some tranche that are comparing...

You know that we've seen in some cases, some discussion around earnings credit rate pressure, but it's been nominal on the individual side of the business or personal banking, you're always going to have some tranche that are comparing.

Yields on interest, earning counts and those are more often than not judgment calls around what we will do based on the nature of the relationship with the client, but Fortunately we were.

yields on interest earning counts, and those are more often than not judgment calls around what we'll do based on the nature of the relationship with the client. But fortunately, we feel like we're operating in pretty rational markets on the deposit front. I mean, I'll just be blunt, there's always gonna be somebody that's crazy out there, but we're not gonna chase crazy. And we'll let them play that game and...

We feel like we're operating in pretty rational markets on the deposit front I mean there.

I'll just be blunt there is always going to be somebody that's crazy out there, but we're not going to chase crazy and we will let them play that game.

We'll stay focused on being rational.

Great.

All of this you mentioned in the.

will stay focused on being rational. Great. All this you've mentioned in the past, kind of the impact of

Past kind of the impact of.

It's a margin win win kind of more of a normalized cash and cash equipped.

of, you know, to margin when when kind of more of a more of a normalized cash and cash equivalent.

On the balance sheet the impact.

The positive impact of when you get to.

on the balance sheet, you know, the impact to the pot, you know, the positive impact of when you get to a

We saw the decline in cash.

Maybe you got a little bit more to go could you range bound what that impact would be when you get back to a kind of a more normal level or are you kind of approaching that on a cash basis. Thanks.

we saw the decline in cash, you know, maybe you got a little bit more to go. Could you range bound what that impact would be when you get back to a kind of a more normal level or are you kind of approaching that on a cash basis? Thanks Hosff.

Yeah, No I think we still have some excess liquidity sitting in that we'll look to deploy in the loan growth.

Yeah, no, I think we still have some excess liquidity sitting in that we'll look to deploy in that long growth.

Sure.

So the cash.

But to be very precise calculating cash still has a 21 basis point dilutive impact to the margin for the second quarter.

So the cash, you know.

To be very precise, calculating cash still has a 21 basis point allude of impact to the margin for the second quarter. Now we obviously, as I mentioned, benefited 13 basis points in the margin from one specific loan early payoff that is visible in acquired loan line item in the margin table. So once you kind of back those out, it's no surprise you get to very close to the margin guidance that I provided of 3.4 to 3.5. That's all we have here today for this week of Code tellers, and of course if you did like and liked this video, if you loved this video, please share it with a friend.

Now, we obviously as I mentioned benefited 13 basis points in the margin from from one specific law on the early pay off that is visible in acquired loan line item in the margin table. So once you kind of back those out it's.

No surprise, you can get to very close to the margin guidance that I provided of three 4% to three 5%, but today's rate environment and that does not necessarily taken account.

percent with today's rate environment and that does not necessarily take into account the potential actions here later in July . Thank you.

The potential actions here and later in July .

All of this is that 'twenty one basis point drag is that taking cash to zero or is that taking it to a level of <unk>.

All this is that 21 basis point drag. Is that taking cash to zero, or is that taking it to a level of?

Historical.

Comfort is taking it's taking to the level of historical will always for liquidity purposes, and intra day cash needs will hold.

historical? Yeah, comfort. It's taken to the level of historical. We'll always for liquidity purposes and intraday cash needs will hold, you know, $50 to $100 million of cash on hand just to make sure that we manage our liquidity properly. So it's taking down to those historical levels.

Call it $50 million to $100 million of cash on hand, just to make sure that we manage our liquidity properly.

So it's taken them down to those historical levels.

Got it perfect. Thanks.

Last one just checking in on the timing, obviously, the rock Canyon approval.

Got it. Perfect. Thanks. And maybe last one. Just checking in on the timing, obviously, the rock canyon approval. This seems like it's well on its way. Is it safe to say that expectations for the two deals, you would think closed by the end of the third quarter and, and then if you could just remind us on your pegs, this conversion timing of those two as well.

It's well on its way is it safe to say that expectations for the two deals you would think close by the end of the third quarter.

And then if you could just remind us on your pegs conversion timing of of those two as well.

Yes, I mean certainly with.

With rock Canyon.

<unk> received.

Yeah, it means certainly with um...

First approval the bitches visit glitches gives us more visibility on timing on that transaction. So we do expect that to disappoint to be third quarter event for our Canyon again.

With Rock Canyon, just received the Fed's approval, which gives us more visibility on timing on that transaction. So we do expect that at this point to be third quarter event for Rock Canyon. Again, the back jax and hole is what we understand. No nothing far behind, but until we get that letter in hand, it's been not gonna speculate on whether it's third or fourth quarter. And whether it's third or fourth quarter.

The BEC Jackson hole is what we understand no no nothing far behind but until we get that letter in hand, it's not going to speculate and learn whether it's third or fourth quarter in terms of integrations again on drug can now that we can stock.

Planning, a little bit more than half dates reserved without core providers.

in terms of integrations again on on on the rock and now to become stocked planning a little bit more and have dates reserved without more providers uh... it is a it is a fourth quarter event i'd do want to stress that whether you're talking about rock can you know our bank of jackson hole there are no known issues related to the approval of either of these banks and i'll say again since we're discussing them just we we actually grow increasingly optimistic about the perspective contribution from each of these contribution from each of these

It is a it is a fourth quarter event I do want to stress that whether youre talking about rock Canyon, our bank of Jackson hole. There are no known issues related to the approval of either of these banks and I'll say again since we're discussing them just we actually grow increasingly optimistic.

About the perspective contribution from each of these teams and the markets they're in and.

I'll say again have absolutely no indication that there will be.

Any issues with approval or getting these.

Closed and integrated on a relatively very fast.

<unk>.

Thanks, guys.

Thank you Jeff.

Okay.

Thank you we take our next question from Andrew Liesch.

Piper Sandler.

Great Hey, good morning, Andrew.

next question from Andrew Lish with Pipe Assembler.

Hey, good morning, guys.

Good morning.

Great. Take good morning, Andrew.

Question on the loan growth here.

Hey, good morning, guys.

Good morning.

In the past you mentioned that 10% to 12% range seems like it's tracking right near that high end, but some of the growth. This quarter was on the residential mortgage side curious.

Question on the loan growth here. In the past you mentioned a 10 to 12% range. Seems like you're tracking right near that high end. With some of the growth here, the order was on the residential mortgage side. Curious.

What's what's the appetite to grow the residential mortgages.

It's more of a one off for the quarter, what sort of products, where you're adding this given that this has been a slowdown in that business lately.

What's the appetite to grow residential mortgages? The smaller one off for the quarter, what sort of products for you adding, just given that there's been a slow down in that business by way.

Yes.

I would tell you it is not our focus.

We still remain confident in driving the vast majority of our growth out of small and medium sized businesses. What's really interesting about this quarter is we did have and we believe in a number of cases. These were temporary pay downs, but what you really have to look at beyond the 12, 3% annualized growth.

Yeah, I would tell you it is not a focus. It, we still remain confident in driving the vast majority of our growth out of small and medium-sized businesses. What's really interesting about this quarter is we did have, and we believe in a number of cases. These were temporary pay downs, but what you really have to look at beyond the 12.3% annualized growth, is the level of fundings that were generated in the quarter to offset some.

It is a little level of fundings that were generated in the quarter.

<unk> set some meaningful paydowns are I will say in a few cases.

Business that moved away on price, we talked about deposit side, just as a just as we're not going to chase that.

<unk>.

On on rates on deposits. We're also not going to retain relationships that are unprofitable and we did see a few relationships move away in the second quarter, but again, we're more than.

Capable of offsetting that with very strong fundings feel very very good about third quarter fundings in the small.

second quarter, but again, we're more than capable of offsetting that with very strong funding. Feel very, very good about third quarter funding in the small and medium-sized business space as well. And again, we are...

And medium size business space as well and again, we are <unk>.

Hyper focused on the quality of the balance sheets of these businesses were looking at and I should add income statements as well.

hyper-focused on the quality of the balance sheets of these businesses we're looking at. And I should add, income statements as well. Intense focus on global cash flow coverage. Intense focus on management teams of the businesses and their strategies for addressing different economic scenarios. And certainly, just given the environment an intense focus on the quality of the balance sheets of the businesses. And certainly, just given the environment an intense focus on the quality of the balance sheets of the businesses. And certainly, just given the environment an intense focus

Intense focus on global cash flow coverage.

Intense focus on management teams of the businesses and and their their strategies for addressing different economic scenarios and certainly just given the environment and intense focus on alternative sources of liquidity.

For coverage or payback of any loans, we're extending so.

I know I kind of went beyond your question, Andrew, but but our focus is clearly small and medium sized business I wouldn't expect a lot.

I wouldn't expect any kind of growth trend out of what we're holding on the balance sheet and residential I'll also add.

Tell us near and Dear to my heart.

We also carry no consumer.

Where it's not as though we're carrying.

to my heart. We also carry no consumer, you know, it's not as though we're carrying floor plan or auto exposure. We don't carry consumer credit card or for that matter any broad consumer exposure. And not that we're suggesting that's bad or good, it's just not something we do.

Floor plan are auto exposure, we don't carry consumer credit card or for that matter any broad consumer exposure and not that we're suggesting that's bad or good. It's just not something we do.

Got it that's helpful. Yes, it may be nice to have some of the mortgage growth, but more of an anomaly with the focus being on the commercial side.

Yeah, I don't bet that's helpful. Yes, it may be nice to have some of the mortgage growth, but more of an anomaly with the focus still being on the commercial site. the commercial site.

So that makes lot of sense on the loans that.

That left was it just on price or are you seeing other people.

So that makes sense. I'm the loans that left. Was it just on price or are you seeing other people commentate on structure to take loan boy from you?

Compensate on structure to take long delay it for me.

No I would I would really tell you it was largely price.

Again, I feel like we're pretty fortunate theres always going to be an exception to the rule, but for the most part.

No, I would really tell you it was largely price. Again, I feel like we're pretty fortunate. There's always going to be an exception to the rule, but for the most part, we're fortunate to operate with what I would describe as rational competitors. I think that bodes well for the primary markets we do business in.

Fortunate to operate with what I would describe as rational competitors.

<unk>.

I think that bodes well for the markets. The primary markets, we do business in.

Got it.

On the reserve build this quarter.

Depreciate the building of it a little bit the macro factors and there is this.

Got it. And on the reserve bill this quarter,

Appreciate the building of it a little bit. This is sort of the macro factors in there. This, I mean, obviously there's a model that you've got to follow. But I mean, you think similar increase is possible in the next couple quarters. Do you think the 106 level is where you want to flatten? And that's kind of, here's how you guys do the reserve.

Obviously the model that you have got a follow up but I mean do you think.

Similar increase as possible in the next couple of quarters do you think the lineup next level is where you wanted to flatten out just kind of curious how you guys view the reserve.

Yes no.

It's hard to talk about what.

How the Moody's model, so a moody's outlooks will change here on how really the economy will evolve what I can say is in the current quarter. The scenario that we are using is is already assuming certain economic slowdown if not authorized recession. So the model the way we view it as appropriately.

Yeah, no, it's hard to talk about what...

how the Moody's models or Moody's outlooks will change here and how really the economy will evolve. What I can say is in the current quarter, the scenario that we are using is already assuming certain economic slowdown if not outright recession. So the model, the way we view it is appropriately conservative that drove the reserve that we need today.

Conservative.

That drove the reserve that we need today.

Sorry, again, just to be very very clear as I mentioned in the market I mean it is all.

But in terms of again, and just to be very, very clear, as I mentioned in the Mars, I mean it is all.

Underlying future outlook scenario for that drove the increase if you look at our credit metrics Npls down NPA is down 30 to 89 past dues down 90, plus past dues down Oreo down classified loans down may now portfolio could not have had a better quarter in terms of credit performance is just the outlook.

On the line, future outlook scenario for the drowdy increase, if you look at our credit metrics, NPLs down, NPLs down, 30 to 89 pass dues down, 90 plus pass dues down, Oreo down, classified loans down, may not portfolio could not have had a better quarter in terms of credit performance. It's just the outlook is that striving.

Is thats driving it.

I'll share something that in all of my years of banking I've not seen before and this is just incredible but we had in the in the small business loan portfolio. We ended the quarter with zero past dues on the.

I'll share something that in all of my years of banking I've not seen before and this is just incredible but we had in the in the small business loan portfolio.

Repeat that zero.

We ended the quarter with zero past dues. I'm gonna repeat that zero.

I mean again, there are a lot of reasons for it including some of the government funding programs coming out of the pandemic, but I will say when we talk about being prepared for economic shocks. We look at the balance sheets of some of these companies in fact, the companies, we bank and I don't think.

I mean, again, there are a lot of reasons for it, including some of the government funding programs coming out of the pandemic, but I will say......

When we talk about being prepared for economic shocks, we look at the balance sheets of some of these companies. In fact, the companies we bank in, I don't think they could be better prepared for downturn. I've in my, all of my years, I've never seen zero pass dues on a quarter end for a portfolio of size. So, just some additional perspective.

They could be better prepared for a downturn in my all of my years I've never seen zero.

Past dues on our quarter end for our portfolio.

Leo of size, so just some additional perspective.

Thanks, Jeff quite the environment we're in.

Thanks for taking the question I will step back.

Thanks again, thank you.

Thanks, yes, quite the environment we're in. But thanks for taking the questions. I will step back.

We take over next question from Andrew <unk> with different thing.

Thank you again. Thank you.

We take our next question from Andrew Terrell with Stephen Think.

Good morning, Hey, good morning.

Maybe just quickly I'll just I wanted to go back to the net interest.

Good morning. Hey, good morning. Hey, good morning. Hey, good morning. Hey, good morning.

Margin guidance for you said three four to three 5% range for the back half of the year.

Just wanted to.

Clarify and make sure that that doesn't assume any further rate increases SaaS, but we've already gotten correct.

That is correct.

Okay.

And then.

Just as you kind of think about that guidance are you, assuming any kind of step up in <unk>.

Posit cough.

As we work into the back half of the year.

So again so.

Discussed, while they're the markets to be RN.

Our.

Fairly rational our competitors major competitors for sure are very rationale.

It's not to say that we haven't seen.

Rate increase.

Offers to our clients.

So.

Long way of saying is that when I project the margin it does not assume any rate increases in deposits.

Now again.

Federal reserve increases here in July whether its $50 75, or 100 basis points.

Suddenly it will be hard to imagine that.

Overall market does not start having more pressure on deposits. So we'll react and make sure that we are competitive and offer fair value to our clients.

But in terms of what again, we are asset sensitive. So we expect that the lull in asset repricing at lease covers that if not of course exceeds the way it has to date.

Okay, great. Thank you.

And then.

I think in the past you guys have maybe given the.

Yield on new production for the quarter are you able to share kind of where new production was coming on in the second quarter versus.

417 kind of average.

Our loan yield in the quarter.

No.

Second quarter, New loan fundings average rate weighted average rate was four 8%.

It's certainly accretive to that $4 17, or really 391 last.

First quarter.

To put that in perspective first quarter, it was closer to 4% and.

Late last year, we held for most part of quarter four handle there was a quarter or two where we dipped in high threes. So so are the disciplined very happy with about the discipline that our bankers have had in terms of new loan funding rates.

The $4 eight again, it's throughout the quarter, so that does not necessarily reflect the the later rate movements that took place in the quarter. So I expect that to drift up here in the third quarter or even more so.

Okay got it. Thank you guys for taking my questions and congrats on a great quarter.

Yes, thank you very much.

Moving forward to Kelly Motta, we cant BW.

Hi, Kelly.

Hi, good morning. Thank you so much further questions.

Maybe.

Ben says.

Your new guidance implies a run rate that's.

A bit below what you had guided for the year last quarter just wondering.

With the inflationary pressure if that.

Revision lower.

Mostly a function of mortgage or if there's other things we're doing to help control.

Expenses.

I know that's been a keen focus in stores for the past several years.

And it continues to be and we will continue to be.

As we really look at every function in our our company and realize opportunities to be more efficient.

We also believe with these two pending acquisitions, we're going to have another opportunity to really look at creating some attractive synergies adopting some of the processes and practices that we've discovered in those two banks and then we'll continue to look at rationalizing our.

Our banking Center network.

It's just.

Practical to be thinking that way as we continue to watch the migration of our personal banking clients to the digital world and.

That lends itself to opportunities too.

Reduce expense so I expect as I said in my earlier comments I expect to see positive trends in <unk>.

In and around the improvement of our operating leverage and in August .

I'll ask you what you would add.

So the primary primary driver down.

The guidance is the mortgage commission as we certainly adjusting.

Fee revenue guidance to.

To the current market environment as well.

If you look at the.

What the run rate is today and what the implied guidance for the rest of the year is there is a little bit of a step up and thats that is.

To be very clear it is to unify Buildout initiative that we continue to invest in and.

But the core banking.

Run rate.

The strategic.

<unk> focus that we have internally and have had for multiple years now on manta.

Managing expense and finding efficiencies that remains there.

And that's the real key.

I mean, youre going to see the natural ebb and flow with mortgage.

Key is what we're doing to continue to improve the core and I really appreciate our teams' focus on that front, they're doing a fine job.

Got it that's really helpful and I appreciated all the earlier color on loan growth and the outlook I know you usually give.

For the year and I didn't I didn't hear that.

Maybe I missed it.

Just wondering if that's some reticence toward.

The pricing competition, youre seeing or if you're still.

Pretty confident that you can hold that outlook after what was a pretty strong quarter.

You heard me right that didn't give an exact guidance.

All around.

Having grown 12, 3% second quarter of 2014 plus percent and year to date basis. We certainly are on track to deliver the full year guidance of 10 to 12.

And as I mentioned, the pipelines that we see today are quite quite strong.

The only call it caution that we have in our.

Outlook is the on X the what we don't know and really the inflationary.

Pressures are real.

That impacts the business activity the rating our rate increases are real that potentially could slow down the borrowing needs and we just don't want to.

Over promise something that is out of our control.

Understood. That's helpful. Maybe one last question for me I know I'm jumping around a little but.

On the deposit cost side.

Obviously, it was very well controlled you guys have a lot of liquidity and balance sheet room and.

Deposit betas were.

You guys had much lower betas in the group overall last quarter is there a is there anything that would suggest you wouldn't again outperform on the funding side here.

Yes.

That continues to crank up rates.

Jeff just wanted to hear your thoughts thanks.

Well again.

Us too.

Comment on what others will do so I can do that what I can say is that.

Our deposit beta last go round was I'll call. It 15 basis points all of that through the full cycle.

Certainly we've had zero beta today, we've seen 150 basis point rate increase on the fed funds at least.

And more to come so whether we can.

Our next.

Basis point of increase hold to 15 basis points, it's hard to tell it will depend on the comparative margins, but I do believe that.

It all comes down to how we approach our deposit gathering efforts, which as Tim mentioned is.

Very much focused on building a full relationship obtaining the operating accounts and the right product that is that'd be offered whether it's a savings money market or time deposit account.

Sure.

Its an ancillary type of excess liquidity that people leave with us our business is Lee with us, but the primary focus is driving their operating accounts in which as you know, it's certainly our noninterest bearing Florida for the most part and I will just say again and again that is our focus.

We are simply focused on earning the operating accounts of our small and medium sized business clients and earning core accounts not free accounts core.

Paying accounts from individuals and their families.

Got it. Thank you. This is really my last one now aldis.

Great.

Modeling.

I think for the back half of the year tax rate is this a good tax rate to use for second half.

The answer is yes, I mean, we have 17, 6% in the second quarter.

It does not assume again any M&A related expenses, which will certainly will take proof of taxable income down and therefore.

Tax rate down more so.

And just to be very clear.

Non taxable income component is not going to change because of the expenses incurred on M&A. So <unk>.

<unk> six I would say is probably high end of the range. If once we start realizing real M&A costs, but.

Again, we don't project any of our numbers with M&A.

Kelly I feel like I'm here, Yes, Kelly I feel like I'm hearing all the analysts this morning pepper all of us with modeling questions I'm going to be real curious to see what all of you come up with.

I really appreciate all the help guys and all the other color as well not just on the modeling questions on the operational side too. So I really appreciate it. Thank you.

You bet have a good day.

We take our next question from rapid.

No.

Hey, Brett good morning.

Hey, guys good morning.

How can we help you.

I guess first.

I'll take another crack at the margin deposit question.

And wanted to.

Just think about.

Obviously, youre going to have some level of higher deposit betas and the margin expansion like many was more than expected maybe in <unk>, but you've got the.

The positives of two solid bags coming on in the back half of the year.

All of this would it be would it be fair to assume that the margin.

Increases in the back half of the year quarterly are somewhat more muted than <unk> can you give us any thoughts on kind of the margin going forward.

Just as you see it relative to the fed hikes from here.

I think I think that's a very fair.

Assessment that the.

Increase from here on out is going to be a little bit more muted because certainly back to the deposit betas are going to remain at zero or negative really we really because we continue to decrease our costs here in the second quarter. So.

<unk>.

They're fully understanding that there will be some.

Deposit repricing up.

The margin benefit from future rate increases I think it will be a little bit new muted than what we've seen.

To date.

Okay.

And what will the balance sheet management look like in the back half of the year with the two additional.

Deals obviously this quarter you used the liquidity.

To kind of manage.

Improved margin.

Does the balance sheet.

In combination with these two acquisitions does that.

Kind of mean that the balance sheet stays a little bit flattish in the back half of the year relative to the assets being added and correct.

Portfolio or can you give us any thoughts on sizing.

Yeah.

Well again.

The two transactions themselves.

Just to recap.

Are we going to add about $1 5 billion in loans $1 2 billion.

In deposits in call it $2 4 billion in total assets.

<unk>.

I will say that those two institution balance sheets are sitting on combined approximately $500 million of cash themselves. So that certainly will is going to provide us with a lot of flexibility whether we talk about.

Having to manage our betas.

The betas and be more maybe aggressive gives us freedom, a little bit more aggressive in terms of not chasing as much or.

Certainly if we continue to on the pace on the loan originations that we've seen year to date then.

Provides a ton of liquidity to deploy into the loan growth and which would be obviously the preferred route for.

<unk> antibody.

Or.

Third option and certainly we'll look at the time of closing.

What the rate environment is then and maybe adding a little bit to the investment portfolio, but again that tends to Tim's point early on.

We've done that to date and very conscious manner with what that does a potential risk to round out around our LCI intangible book value print.

So.

Any and all of that move would be a very high focus on short duration.

Type of asset that is a risk.

Risk reward is there.

Okay and then obviously you just mentioned <unk> can you give us any update on those two transactions in terms of initial dilution to tangible book given the ALJ.

Yes, so what.

What the tangible book value.

What we had put in their original decks and no reason to update order change those guidance is right now so rock Canyon Bank, we had four 8% tangible book value dilution.

Thank you Jackson, all seven 2% so four combined call it 12, 12%.

Tangible book value day, one dilution.

Okay.

Alright, and then maybe a question just on credit and it seems like there is such a just.

Like you mentioned, Tim earlier, such as strange environment that we're in.

And one of the things that's interesting is credit can't seem to get much better than it is.

For most of the industry, but obviously the market and investors are worried about a recession and the implications for credit quality.

Yes exactly.

Yes, Tim as you look out at the at the World.

You know what what asset classes everyone's worried about consumer to some degree but as you look out is there anything that you guys have circle that you would say.

With your portfolio or just from a from a lending perspective that you think like hey. This this should be watched more than other categories are there anything is there anything that you are kind of easing up on in terms of wanting to be bigger in.

Well.

I think the fact that we're not a player in national syndication certainly not in areas like highly leveraged transactions that we tend to stick with fundamental knitting around small and medium sized businesses that.

That have strong track records of performance through different economic cycles of bodes well for US we're always worried about commercial real estate, hence our low levels of commercial real estate relative to risk based capital.

You could certainly but everybody is you know everybody has the same observation you could certainly pull out certain areas of commercial real estate and arguably be even more concerned.

And coming back to what we believe are critical to understanding credit risk and that's.

That's global cash flow coverage that secondary and third sources of repayment should you have a fundamental issue on the front end.

It's it's management experience through again, these cycles and and so I don't tend to think about any particular industries or sub sectors.

That.

We've said absolutely no two outside of strategic decisions like exiting <unk>.

Energy a number of years ago that frankly had nothing to do with ESG and more to do with just not being able to get our.

Heads around as senior bank lenders being able to take the volatility risk.

So as we see as Rick and his team if they identified sectors or sub sectors, where we also see a level of risk volatility that would suggest we can't earn adequate risk adjusted returns on senior bank debt, we will not be afraid to exit them, but I cant.

Two.

I can't I can't really call out any particular sectors as we sit here today.

Okay.

Fair enough I appreciate all the color.

You bet you bet. Thank you Brett.

Thank you and I'm showing we have no further questions. At this time I will now turn the call back to Mr. Laney for his closing remarks.

Thank you Carl and I want to thank everyone for their questions and your interest in National Bank Holdings have a great day.

And this concludes today's conference.

We would like to listen to determine.

This call will be available beginning in approximately four hours and will run through July 28, 2022 by dialing two E E.

Two zero.

1112, and referencing passcode.

<unk> E 8483, the earnings release and online replay of this call will also be available on the company website under Investor Relations Beach. Thank you very much and have a great day you may now disconnect.

[music].