Q3 2022 National Bank Holdings Corp Earnings Call
Good morning, everyone and welcome to the National Bank Holdings Corporation 2022 third quarter earnings call. My name is Keith and I'll 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.
Mind you. 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 noninterest income margins allowance taxes, and noninterest expense actual results could differ materially.
From those discussed today.
These forward looking statements are subject to risks and uncertainties and other factors, which are disclosed in our or detailed 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.
I will reference certain non-GAAP measures, which National Bank Holdings Corporation believes it 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 Dot National Bank Holdings Dot com.
It is now my pleasure to turn the call over and introduce National Bank Holdings corporate.
Corporation's Chairman President and CEO , Mr. Tim Laney. Please go ahead. Thanks, Thanks, Keith Good morning, and thank you for joining us as we discuss National Bank Holdings third quarter 2022 financial results I'm joined by Aldis, Burkins, our Chief Financial Officer.
We're pleased to deliver quarterly core earnings of <unk> 80 per share.
We recorded organic loan growth of 32% and increased average total deposits 10, 3% annual watched it's noteworthy that to date, we have experienced a nominal increase in the cost of deposits.
It's also important to point out that all asset quality metrics remain strong and that we have prudently increased the conservative ness of our underwriting standards in light of questions around the economy on that note I'll turn the call over to our CFO oldest burkins oldest alright. Thanks, Tim.
Good morning.
We delivered another strong quarter of financial performance. While also completing the acquisition of rock Canyon back just to bring you up to date. So far in October . We also have closed on the back of Jackson hole acquisition and successfully completed the rock Canyon Bank system integration.
The integration of bank of Jackson hole systems is scheduled for later this quarter and will allow us to enter the next year well positioned to build on the opportunities each bank presents.
Overall, our strong results during the quarter were driven by exceptional loan growth expanding net interest margin and as always carefully managed expenses.
For the third quarter of 2022, we reported net earnings of $15 8 million or 50 cents per diluted share.
During the quarter, we realized approximately $7 million of transaction related expenses.
As well as increase our loan loss provision expense by $5 $4 million as part of the day, one sies or reserve for the rock Canyon loan portfolio.
Excluding these transaction related items, our adjusted core net income was $25 $3 million or <unk> 80 per diluted share.
As a 16% increase over the prior quarter suggested results.
Our pre tax pre provision net revenue, excluding the transaction expenses grew $11.3 million or 38% on a linked quarter basis.
As a reminder, this quarter included only one month of rock Canyon Bank's financial performance.
We are capitalizing on the economic resilience of our markets and continue to gain market share across our geographies.
During the quarter, we funded $631 $6 million in loan originations, which was another quarterly record.
The total loan portfolio grew to $905 million during the third quarter.
After adjusting out the rock Canyon Bank loan book addition of $538 million.
Our loan portfolio grew a strong 32% annualized.
Net interest margin expanded 63 basis points and fully taxable net interest income increased $13 $1 million or 99% annualized on a linked quarter basis.
And while average, earning assets grew $180 million or 10, 5% annualized during the quarter. The main driver for the net interest income growth, but the loan portfolio to pricing.
The total average rates for loans held for investment increased from four 4% in the second quarter to 5.0% in Q3.
We were successful in managing deposit beta during the quarter and the total cost of deposits increased just two basis points.
Looking ahead for the fourth quarter 2022 at this time, we project NBA, just net interest margin to remain at around 4%.
In terms of our asset quality remains strong with decreases in both the classified and criticized loan ratios. The third quarter's net charge offs were just one basis point annualized.
And both the nonperforming asset ratio and the NPL ratio remained low.
During the quarter, we recorded a provision expense of $12 7 million and as I already mentioned earlier $5 $4 million was driven by the establishment of day, one allowance for credit losses for the rock Canyon Bank loan portfolio.
Approximately $3 $9 million of the provision expense was to support the strong organic loan growth and the remainder was seasonal model driven increase that 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 1.15%.
Total third quarters, noninterest income was $17 $4 million or a $600000 increase from the second quarter.
The continued slow down of our mortgage business was more than offset by record quarterly bank card revenues and strong core banking service charge income as well as a nice unrealized gains from our equity method investments.
Looking ahead for the fourth quarter 2022, we are projecting our total fee income to be in the $15 million to $17 million range.
Noninterest expense totaled $53 9 million and included approximately $7 million of acquisition related costs.
On a year to date basis, we have realized approximately $8 3 million of acquisition related expenses and at this time, we are projecting to come in well below our told modeled transaction costs for both transactions.
Our non interest expense run rate remains well controlled excluding these acquisition related expenses. The third quarter's core banking expense was $47 million compared to $44 $5 million of core expense in the second quarter.
The linked quarter increase was primarily driven by the addition of one month of rock Canyon expenses.
For the fourth quarter of 2022, we are projecting noninterest expense to be in the range of $64 million to $66 million <unk>.
Included in this projection is an estimated $5 million to $6 million of transaction related expenses yet to be realized.
As well as a full quarter of expense run rate from both acquisition.
Most of the cost saving efficiencies from the two bank acquisitions are being realized gradually and will continue through the fourth quarter and into 2023 as such I will provide more guidance for the full year 2023 projections on January's earnings call.
Our capital ratios remained strong at 12, 8% common equity tier one ratio and $9 six tangible common equity ratio.
Our tangible book value per share was $22 40 as of September 30th any deflects the full impact of the rock Canyon back acquisition.
We closed the bank of Jackson hole acquisition on October <unk>, and the purchase accounting impact of this transaction will be reflected in the Q4 results.
Our effective tax rate for the quarter was 22, 1% an increase driven by the higher than projected pre tax income through September 30.
For the fourth quarter, we projected tax rate to return $2, 18% to 19% range.
We ended the quarter with $33 2 million shares outstanding and after incorporating the share issuance for the bank and Jackson hole acquisition, we projected fourth quarters average diluted shares to be around 38 million shares outstanding.
With that I'll turn it back to you. Thanks, all this week.
We could not be more pleased with our recent acquisitions of rock Canyon Bank and the bank of Jackson hole, both banks operate in very attractive markets and each deliver strategically important services that we intend to sell across the remainder of our enterprise again I couldnt be more pleased with these two acquisitions in that.
Caliber of our new teammates I believe these two acquisitions have the potential to meaningfully exceed our initial learnings expectations and on that note Keith let's open up the line 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 allow your signal 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.
We will take our first question from Jeff Lewis with D. A Davidson. Please go ahead.
Thanks, Good morning, Hi.
Hi, Jeff.
Tim mentioned the.
Nominal increase in deposit costs.
Could you share with US again, what you were beta assumptions for the cycle on on.
On deposit betas are.
Yeah, well, let me start by saying that we could not be more pleased how we.
How are we positioned the balance sheet through the cycle and through the all the excess liquidity to be gathered through the.
Post pandemic environment.
As you recall, we maintain most of it in.
In cash.
Which allowed us not only to gather a huge margin expansion here and be.
Prudent on deposit betas, but suddenly.
It's helped.
<unk> impact as well so looking into the.
I had we will not be have not been price leaders on the rates. So if you look at dollar and we've talked about it before VR relationship type of bank that we strive for Florida property transaction accounts.
And we've been able to date.
<unk> managed our betas quite nicely how it is going to go from here certainly we will have to respond to markets as markets.
Adjust however, we are not going to be the price leader.
Okay. So should we expect a similar.
Yes prior cycle beta again, this time around or do you think you're better positioned to potentially.
Improve upon that.
Well I think on the interest bearing deposits it would probably be similar.
If you look at our balance sheet composition prior cycle, we had.
Smaller DDA to total balance or noninterest bearing deposits to total balance mix. So overall beta it should be a little bit better. If you look at it 40, 40% noninterest bearing deposit mix than we have today again going back to the relationship based model.
So overall I think it might be slightly better, but no reason to think that we would be.
Once the cycle is over be any different than before.
Okay, and I guess, leading to the Mar.
Margin discussion of.
Around 4%.
I guess that surprises me that it just sort of it's going to flatten out here given the pace of that.
The earning asset increase I guess.
Does that number include accretion that the 4%.
Ben.
I guess does that assume you see a pretty rapid decrease in that.
Ending or that.
Liability costs are less.
Quarter.
You you've kind of pointed out a few theres multiple items for at least for our balance sheet to take place in the fourth quarter that makes it tricky to forecast where the margin will be.
Suddenly we have bank of Jackson hole coming on that balance sheet hard.
Rock Canyon Bang had one month's now it will be full quarter balance sheet impact the purchase accounting Mark accretion impact certainly doesn't seem like the fed is done yet and looking at another rate hike next week that impact and then certainly to your original question on beta somewhat deposit costs do so at this point that best incorporating <unk>.
All of that it does feel like.
He is going to be 4%, but.
Again.
There's just so many moving pieces that I don't want to.
Well it will.
Providing more and more guidance in 2023, four fold year for next year.
Okay. Thanks al.
Tim I wanted to check in with you on.
I know that sounds like some more guidance for 'twenty three is coming but just a.
Big picture think about 'twenty three organic growth.
Early in the pandemic.
The bank was was pretty cautious unique times, but but lending was was.
You know I guess smaller than historical I guess, how do you see the upcoming environment give it from your seat just economic outlook.
Where you think big picture organic growth on a net basis is in 'twenty three.
Jeff Great question.
It begins with a bias toward more conservative underwriting in any cases, where we're using our balance sheet. We've actually while we certainly hope this doesn't come to fruition in the marketplace. We've now moved to underwriting debt serviceability on our global cash flow basis for any.
Any borrowing client using double digit interest rate scenarios again, we would hope that that doesn't come to fruition.
But we're not banking on hope we're prepared.
To understand that our clients could cover that at those kind of rates if if need be.
<unk> for the fourth quarter in our core commercial.
And small business arenas are is as solid as ever and as we've said before we continue to benefit from from operating in very healthy and strong markets I could not be more pleased with what I've seen in the early days of bringing rock Canyon.
And bank of Jackson hole on board to include some pretty interesting dynamics around gathering additional low cost deposits in the market. So I E.
Genuinely feel very good about the strength of our capital position as we faced uncertain times with the economy I feel very good about the markets we're operating in.
Feel like in so many respects the teams are operating at or near.
A point of running on all cylinders and while my teammates have certainly worked very hard.
To bring these two acquisitions to close in such a short timeframe no. One has taken their eye off the ball in terms of taking care of clients and profitably growing the business. So oh.
What you should be hearing there, Jeff is quite a bit of optimism despite the uncertainty.
I think I've mentioned in my.
Talking points that are.
Yeah.
I'm already and I have to use the word believe but I believe.
That.
We are really well positioned to realize stronger returns from these two acquisitions than we had modeled in any of our acquisition scenarios. So keep in mind that we.
Now I'll have a trust business that we are confident we can leverage across our entire enterprise that's coming out of bank of Jackson hole, if youre not familiar with Wyoming Trust fall everyone. On this call should have their trust.
Just in Wyoming and bank of Jackson hole stands ready to help you accomplish those goals and then secondarily, we are absolutely impressed with the processes in place for providing.
SBA loans to small and medium sized businesses, that's been brought to us by rock Canyon Bank. It's noteworthy that they remained number the number one bank in the state of Utah talking about punching above your weight number one state in the bank of Utah for production of SBA lending so.
No.
If you don't detect a little bit of optimism and what youre hearing from Jeff you're not listening.
Fair enough loved the trust plug I'll step back thanks.
We'll take our next question from Kelly Motta with K B W. <unk>. Please go ahead.
Hi, Thank you so much for the question and congrats on closing.
Both deals relatively recently.
Kelly.
I wanted to circle back to loan growth because I'm on the organic basis. It was incredibly strong.
Tim I'm wondering if you could provide any color on the granularity of that well.
You added I know your loan book tends to be.
No more granular side, but I'm wondering if there's anything chunky or unusual in that composition at Lake Charles.
No I mean.
Back to my reference is firing on all cylinders. We've we've seen solid production really across all of our specialty teams. When I say that teams focused on particular industries or geographies have been strong and I do want to emphasize that this is all relationship.
Oriented business and our bankers are rewarded for capturing the full relationship are earning the full relationship with these clients. So you can also expect to see.
Our I certainly expect to see a nice growth in our Treasury management services.
And obviously, capturing those transaction deposit accounts are important to us in terms of keeping up.
Cost of deposits down but I.
I will tell you that it remains pretty granular.
And.
We're just we're making inroads in a lot of these markets, we've invested time in and bringing relationships over from other institutions for a number of different reasons I will say Kelly.
That getting.
Getting back into the office and beginning to get out in front of clients as early as labor day of 2020 seems to really be paying dividends.
At the end of the day, when you're working to earn a new relationship. It is not just true for banking, but I think for any important.
Relationship you've got to be willing to get face to face you have got to be willing to put in the time together to strategize, what makes sense and I am proud of my bankers, because they've been doing that since labor day of 2020.
Got it.
Thanks for all the color that's super helpful.
Maybe it turns on.
The size of the balance sheet I know, there's a lot going on with them.
Third quarter impact.
The first deal and the second one.
Close in October .
But it.
It looks like you still have plenty of balance sheet flexibility.
I'm wondering about kind of how we should be thinking about funding loan growth going forward any color maybe aldis on cash flows off the securities book, and just kind of managing the size of the balance sheet to support you know what it's clearly been a really strong.
Production engine that you have there.
Sure sure.
Yes, So certainly first first and foremost would love to to finance any loan funding with core deposit growth and that will be and continues to be our primary.
I'm Mary focus as they.
Mentioned, we not necessarily going to pay up for deposits, but.
As Tim mentioned on the <unk>.
Combines relationship scorecard for our bankers and they get paid on bringing both sides of the balance sheet together. So deposits number one in terms of the investment portfolio that that continues as you know we historically have build it with the cash flow in mind, so that cash flow. So that's about $18 million to $20 million a month.
That is.
Projected for the next 12 months or so so that's a nice source if need to be funding.
Additionally, loan growth as well and then suddenly you have still a little bit more excess liquidity left left from from US we didn't deploy that so those are kind of the three main sources in near term.
Got it and then you.
It still sits at 84% loan deposit ratio I think historically we've.
B be bumped up to 95, I think that's probably where we feel comfortable to go to.
When we build out fully leveraged the balance sheet. So.
Suddenly don't look to reach to 100% loan deposit ratio, but we still have some room to move there too.
Got it maybe last last question from me has to do with asset sensitivity I really appreciate that.
Guidance around the margin for <unk>.
There is some.
The full quarter impact of both deals coming through on that just thinking kind of on a go forward basis.
Uh huh.
Based on this kind of Youre set up I would think you would still be asset sensitive, but maybe it's the deals keeping you more steady next quarter.
But just wondering kind of from a high level. It is what we should be thinking about more neutral to rising rates going forward or.
Any help on that would be would be great sure.
We continue to be asset sensitive not as much as we were a quarter or two ago.
So some of the asset sensitivity has come out as the.
The cash of which a big chunk of the asset sensitivity was sitting in cash right. So to the extent that cash has been <unk>.
In the fixed rate loan that that's been taken off the table locked in at very good yields now.
So.
But we still at both between the two banks I'd say Rod Canion was more asset sensitive given the nature of their business of SBA.
Thanks, Jackson, a little less asset sensitive than done us.
So on net net basis, I think they kind of complement.
Where we were.
But on a go forward basis from here on out we probably are.
I'd say half if not less asset sensitive as we were say two quarters ago.
Got it that's super helpful. Thanks for the time now.
Thank you Kelly.
We will take our next question from Andrew Trail with Stephens incorporated. Please go ahead.
Hey, good morning, Tim Good morning, All Hey, good morning, Andrew.
Hey, Thanks for the time today I don't want to beat a dead horse, but maybe just to start on the margin.
<unk>.
All of this do you have what the margin was down in the month of the month of September .
It was slightly above 4%.
And then can you just remind us was that the bank of Jackson hole, how accretive or dilutive that was to the margin just pro forma.
So bank of Jackson hole didn't come on the books until October one so it was neither it was not.
Rod Canion bank added in the.
Net interest income.
Line, approximately three two maybe $3 $5 million.
Understood Okay.
So maybe I guess I'll just shift gears over to capital I guess with both acquisitions kind of out of the way at this point capitalist.
Capital is still in a pretty solid position.
Can you maybe just update us on how you're thinking about your.
Capital positioning from here and then can you remind us if theres any buyback in place and whether or not you have any any appetite there moving forward.
We will certainly maintain optionality around buying in shares.
And we happen to believe that we're going to be generating very strong earnings.
Would support a meaningful move in stock price.
In 'twenty, three and should the market move against Us and we have an opportunity to buy we will pursue that.
But we also remain focused on.
Yeah.
Some other I'll I'll describe them as very strategic partnerships or acquisitions.
And we are just as focused on our work around to unify and while I haven't mentioned it today again I couldnt be more pleased with the progress the team is making on that front. So.
I guess it might be helpful to talk about what we're not as inclined to do.
And we've become I think very black and white on this point, we are not going to be the acquirer.
<unk>.
Call it less than $1 billion banks that are are not operating in growth markets.
We will not fall trap to simply acquiring banks, because we can acquire them at a good price and realized some accretion of earnings over a couple of years as a result of expense savings.
Any bank acquisitions will be strategic we will be in growth markets will fit our culture and our our approach to underwriting credit.
And outside of that we will be focused on other specialties specialty businesses that would benefit both the core banking to unify.
So I know Andrew that's probably a little more than you were looking for but thats about as much detail as I provided in a while now that was a that was great color I really appreciate it Tim.
Okay, and then if I can ask just one more.
On the loan growth this quarter or did you see any improvement and line utilization did that play much of a role in a in a strong level of growth and then.
Can you remind us where just utilization sits overall, how that compares to kind of pre pandemic and then your outlook for for commercial line utilization.
Yeah. So on page 10 number on a long table you can see in our footnote. The details last five quarters of line draws WEC and you can see it was a bit elevated this quarter.
We're higher than historically, but I will say that we both just as many commitments. So the line utilization itself.
The way, we measure for commercial all of our commercial lines.
<unk> sitting at 62% and Thats been right, where we historically have been on the average.
Okay.
Appreciate it thanks for the time today, congrats on a good quarter I'll step back. Thank you.
We will take our next question from Andrew Leisch with Piper Sandler. Please go ahead.
Good morning, guys how are you.
Well doing very well thank you good good.
I think a quarter ago, you mentioned there'll be a couple million dollars per quarter or two unifi expenses in the third and fourth quarter.
Did that where that was fully realized here in the third quarter.
Third quarter, it was about $1 million of unified related $1 $1 million of unified related expenses.
Embedded in my guidance as in <unk>.
<unk> of that in slight growth.
And then as we entered the 2023 I'll be more detailed on that projection.
In January earnings call.
Got it.
And then on the fee income guide does that include both acquisitions at $15 million to $17 million.
In terms of guidance. It does it does so in terms of.
So certainly we're seeing that.
Mortgage continues to slow down so that reflects that.
In the third quarter, we had the unrealized gain a pickup in an equity method investments.
So im not counting on not necessarily repeating and that's why you see a little bit of a step down there but.
It does include both banks.
Got it.
Makes sense you've covered all my other questions. Thanks, guys.
Alright, Thank you Andrew.
We will take our next question from Jeff <unk> with D. A Davidson. Please go ahead.
Thanks, just a couple of follow ups.
I don't know if you've referenced this just wanted to confirm the thought of.
As we closed the year end.
Certainly looks like.
You'd stay below $10 billion is that is that fair to assume.
Well the on a pro forma basis.
We identified in the earnings release on.
On day, one we were $9 $4 billion asset size bank.
But it <unk> apply but we need to grow to $600 million switch.
At this point say that we will stay below 10 plus.
Plus back onto the Optionality and flexibility I think go back to being why we are so.
Cautious and prudent on deposit betas that allows us to make it make sure that we make all the right culture and aldis remind everyone.
Around the timing of crossing over the $10 billion threshold in terms of impact on on any fee income.
So really once we do cross and again it doesn't seem likely four.
At the end of <unk> for this end of this year. So it's really.
It's 15 months out.
But in today's run rate basis, it would be impacting us about $8 million to $9 million.
Interchange income from Durbin.
Which is certainly like 2% of October revenues, so very manageable amount yeah. I think the real point is that you were talking a bit of an impact that would be 15 months out in terms of of regulatory standings are standards around our core bank processes.
That investment was made years ago. So we're in a good very good place with our regulators on that front in terms of infrastructure and position of the bank.
<unk>.
We do benefit from the fact that we're not a heavily consumer focused institution.
Hence the smaller impact on on the piece that all just mentioned.
Thanks, and just to clarify a couple of the guides aldis.
$64 million to $66 million on expense again that includes.
Further merger expense, so kind of the core is closer to 60.
All in.
It was closer to 60 days so to build a build it up you got it. So first of all yes. It does include the transaction expenses that we still yet to incur here in the fourth quarter.
You take those out the quarters closer to 60 on.
And to build that up just for clarity.
As we know NBA, which we have been running on standalone basis about $45 million.
Our quarterly run rate higher in the quarters, when we had higher mortgage commissions lower now that it's gone.
That component has gone down somewhat offset by to unify components, so call it $45 million, which implies about.
Call It <unk>.
<unk> 15 ish or so million dollars of between the two banks.
They have been running.
A pre purchase or pre acquisitions that had been running 16 to maybe even 17 million trend.
So we are already incorporating about 10% to 20% cost saves here in fourth quarter and certainly that's not done yet there yet.
So I hope that helps.
Yes, no that was more than a bargain floor I appreciate it.
And then.
Just also on the margin guidance.
I can't remember all this do you are you, including the assumption of a fed.
Hi, still.
Kind of consensus view.
Still its still come year to date in that fourth quarter Guide margin Yeah. It's all inclusive, let's put it this way because again the.
Hum just for clarity perspective for example for the deposit side and.
If.
We were to combine both rock Canyon, and bank and Jackson hole cost of deposits, which came on between 40% to 50 basis points to our 2018, certainly that will have an impact in itself to on that just in terms of forecasting and projecting for the fourth quarter deposit betas will look like as Dave went up.
But it's just incorporating their current cost of funds without us moving into deposits. So.
My attempt here was to incorporate all of that in that 4% guidance, including the whatever the actions may be coming and Jeff just on that last point around rock Canyon Bank and the bank of Jackson hole, just as I talked about certain capabilities, we expect our skills from those banks and to the rest of <unk>.
Our enterprise, we see really nice opportunity for low cost deposit gathering as we drive our treasury management capabilities.
And the focus on capturing full relationship.
To those markets.
Those those bank so Mike.
Full expectation is that we will see the cost of deposits in those markets actually come down.
From on a relative basis.
Where they had operated historically.
Yes.
Makes sense. Thank you.
Yeah.
Thank you I am showing we have no further questions at this time I will now turn the call back to Mr. Laney for his closing remarks.
I'll just simply say thank you.
I do want to thank all of my teammates again for.
Just delivering what I view as brilliant results and more to come folks. We're excited about our future have a good day.
And this concludes today's conference call the earnings release, and an online replay link of this call will be available on the company's website on the Investor Relations page. Thank.
Thank you very much and have a great day you may now disconnect.
[music].
Yes.
Uh huh.
[music].
Yes.
Yes.
Yes.
Yeah.
[music].