National Bank Holdings Corporation (NYSE:NBHC) Q3 2022 Earnings Conference Call October 28, 2022 11:00 AM ET
Company Participants
Tim Laney – Chairman, President and CEO
Aldis Birkans – CFO
Conference Call Participants
Jeff Rulis – D.A. Davidson
Kelly Motta – KBW
Andrew Terrell – Stephens Inc.
Andrew Liesch – Piper Sandler
Operator
Good morning, everyone. And welcome to the National Bank Holdings Corporation 2022 Third 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 would like to remind you that this conference call will contain forward-looking statements, including, but not limited to statements regarding the company’s strategy, loans, deposits, capital, net interest income, non-interest income, margins, allowance, taxes, and non-interest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks and 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 undertake no obligation to update or revise these statements. In addition, the call today will reference certain non-GAAP measures which National Bank Holdings Corporation believes provides useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations section of www.nationalbankholdings.com.
It is now my pleasure to turn the call over and introduce National Bank Holdings Corporations Chairman, President and CEO, Mr. Tim Laney. Please go ahead, sir.
Tim Laney
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 Birkans, our Chief Financial Officer.
We are pleased to deliver quarterly core earnings of $0.80 per share. We recorded organic loan growth of 30.2% and increased average total deposits 10.3% annualized. Its 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 conservativeness of our underwriting standards in light of questions around the economy.
On that note, I’ll turn the call over to our CFO Aldis Birkans. Aldis?
Aldis Birkans
Alright, Thanks, Tim. And good morning. We delivered another strong quarter of financial performance while also completing the acquisition of Rock Canyon Bank. Just to bring you up-to-date so far in October, we also have closed on the bank 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 2022, we reported net earnings of $15.8 million or $0.50 per diluted share. During the quarter we realized approximately $7 million of transaction related expenses, as well as increased our loan loss provision expense by $5.4 million as part of the day one CECL reserve for the Rock Canyon loan portfolio.
Excluding these transaction related items, our adjusted coordinate income was $25.3 million or $0.80 per diluted share, which is a 16% increase over the prior quarters adjusted results. Our pre-tax pre-provision net revenue excluding the transaction expenses grew $11.3 million or 38% on quarter basis. And as a reminder, this quarter included only one month of Rock Canyon and banks financial performance.
We are capitalizing on the economic resilience of our markets and continue to gain market share across all geographies. During the quarter we funded $631.6 million in loan originations, which was another quarterly record. The total loan portfolio grew $905 million during the third quarter, and after adjusting out the Rock Canyon bank loan book, addition of $538 million.
Our loan portfolio grew a strong 30.2% annualized net interest margin expanded 63 basis points and fully taxable net interest income increased $13.1 million or 90.9% annualized on 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 was the loan portfolio pricing. The total average rate for loans held for investment increased from 4.4% in the second quarter to 5.0% in Q3. We were successful in managing deposit betas 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 NBHs net interest margin to remain at around 4%. In terms of our asset quality, it remains strong with decreases in both the classified and politicized loan ratios. The third quarters net charge offs were just one basis point annualized and both the non-performing assets 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 CECL model driven increase. That reflects the increased economic uncertainty as indicated by the Moodys forecast scenarios. As a result our ACL ratio, the total loans ended the quarter at 1.15%. Total third quarters non-interest income was $17.4 million, or a $600,000 increase from the second quarter. The continued slow down upon mortgage business was more than offset by record quarterly bankcard 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 to $17 million range. Non-interest expense total of $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 total model transaction costs for both transactions. Our non-interest expense run rate remains under control. Excluding these acquisition related expenses the third quarters core banking expense was $47 million compared to $44.5 million, of core expense in the second quarter. Building quarter increase was primarily driven by the addition of one month of Rock Canyon to expenses.
For the fourth quarter of 2022 we are projecting non-interest expense to be in the range of $64 million to $66 million. 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 acquisitions. Most of the cost saving efficiencies from the two bank acquisitions have been realized gradually, and will continue through the fourth quarter and into 2023.
As such, I will provide more guidance with the full year 2023 projections on Januarys earnings call. Our capital ratios remain strong at 12.8% common equity tier one ratio and 9.6 tangible common equity ratio. Our tangible book value per share was $22.40 as of September 30 and it reflects the full impact of the Rock Canyon bank acquisition. We closed the Bank of Jackson Hole acquisition on October 1, and the purchase accounting impact of this transaction will be reflected in the Q4 results.
Our effective tax rate for the quarter was 20.1% and increased demand by the higher than projected pre-tax income through September 30. For the fourth quarter we projected tax rate to return to 18% to 19% range. We ended the quarter with 33.2 million shares outstanding. And after incorporating the share issuance for the Bank of Jackson Hole acquisition, we projected fourth quarters average diluted to be around 38 million shares outstanding.
And with that, I’ll turn it back to Tim.
Tim Laney
Thanks Aldis. We cannot 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 couldn’t be more pleased with these two acquisitions in the 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 lets open up the line for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Well take our first question from Jeff Rulis with D.A. Davidson. Please go ahead.
Jeff Rulis
Tim mentioned rather nominal increase in deposit costs. Could you share with us again, what you were beta assumptions for the cycle on deposit beta are?
Tim Laney
Yes, well, let me start by saying that we could not be more pleased how we positioned the balance sheet through the cycle and through all the excess liquidity to be gathered through the post pandemic environment. As you recall, we maintained most of it and in cash, which allowed us not only to gather huge margin expansion here and be prudent on deposit betas, but certainly has helped AOCI impact as well. So looking into ahead, we have not been price leaders on the rates.
So if you look at our and we’ve talked about it before the relationship type of bank, we strive for primary transaction accounts. And we’ve been able to-date manage our betas quite nicely. How it’s going to go from here certainly, we will have to respond to markets as markets adjust. However, were not going to be the price leader.
Jeff Rulis
So should we expect a similar I guess, prior cycle beta, again, this time around? Do you think you’re better positioned to potentially improve upon that?
Tim Laney
Well, I think on the interest bearing deposits, it probably be similar. If you look at our balance sheet composition, prior cycle, we had smaller DDA to total balance or non interest bearing deposit to total balance mix. So overall beta should be a little bit better if you’re looking at 40% non interest bearing deposit mix that we have today, again, going back to the relationship based model. So overall, I think might be slightly better, but no reason to think that we would be once that cycle is over be any different than before.
Jeff Rulis
And I guess leading to the margin discussion of around 4%. I guess that surprises me that it just sort of is going to flatten out here, given the pace of the earning asset increase, I guess. Does that number include accretion the 4%? And then, I guess, does that assume you see a pretty rapid increase in the funding or the liability costs link quarter?
Tim Laney
Yes. You kind of pointed out a few that there’s multiple items for at least for our balance sheet that 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. Rock Canyon bank had one month now, will be full quarter balance sheet impact. The purchase accounting market creation impact, suddenly doesn’t seem like the Fed has 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 all that, it does feel like it’s going to be 4%. But again, it just so many moving pieces that I don’t want to, we will be providing more guidance in 2023 for full year for next year.
Jeff Rulis
And, Tim, I wanted to check in with you on I know that sounds like some more guidance for 23 is coming. But just the big picture think about 23 organic growth early in the pandemic, your bank was pretty cautious, unique times. But lending was I guess smaller than historical. I guess how do you see the upcoming environment given from your seat just economic outlook and where you think, big picture organic growth on a net basis is in 23?
Tim Laney
Jeff, great question. It begins with a bias toward more conservative underwriting. In any case, where were 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 a global cash flow basis for any borrowing client using double digit interest rates scenarios. Again would hope that doesn’t come to fruition. But were not banking on hope.
Were prepared to understand that our clients could cover debt at those kinds of rates if need be. Pipeline for the fourth quarter in our core commercial and small business arenas are as solid as ever. And, as we’ve said, before, we continue to benefit 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 genuinely feel very good about the strength of our capital position as we face uncertain times with the economy. I feel very good about the markets were operating in. I 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 what you should be hearing there, Jeff, is quite a bit of optimism despite the uncertainty. I think I mentioned in my talking points that 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 have a trust business that we are confident. We can leverage across our entire enterprise that coming out of Bank of Jackson Hole. If you’re not familiar with Wyoming Trust law, everyone on this call should have their trust based 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 been brought to us by Rock Canyon bank. Its noteworthy that they remain number one bank in the state of Utah, talking about punching above your weight, number one state and the Bank of Utah for production of SBA lending. So if you don’t detect a little bit of optimism, and what you’re hearing from the Jeff, you’re not listening.
Operator
Well take our next question from Kelly Motta with KBW. Please go ahead.
Kelly Motta
Hi, thank you so much for the question. And congrats on closing both deals relatively recently.
I wanted to circle back to loan growth because on an organic basis that was incredibly strong. Tim, I’m wondering if you could provide any color on the granularity of about what you added. I know your loan book tends to be on the more granular side, but I’m wondering if there was anything chunky or unusual in that composition because it was just so strong?
Tim Laney
No, I mean, back to my reference of firing on all cylinders. We’ve seen solid production really across all of our specialty teams, when I say that teams focused on particular industries, our 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 or earning the full relationship of these clients. So you can also expect to see or 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 cost of deposits down.
But I will tell you that it remains pretty granular. And were just, were making inroads and a lot of these markets that we’ve invested time in, and bringing relationships over from other institutions for a number of different reasons. I will say, Kelly, that 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’s not just true for banking. But I think, for any important relationship, you’ve got to be willing to get face to face. You’ve got to be willing to put in the time together to strategize what makes sense. And I’m proud of my bankers, because they’ve been doing it since Labor Day of 2020
Kelly Motta
That’s super helpful. Maybe in terms of the size of the balance sheet. I know there’s a lot going on with these — full quarter impact of the first deal, and the second one, just close on October 1. But it looks like you still have plenty of balance sheet flexibility. Wondering about kind of how we should be thinking about funding, loan growth going forward? Any color maybe Aldis on cash flows off of the securities book, and just kind of managing the size of the balance sheet to support what is clearly been a really strong production engine that you have there?
Aldis Birkans
So certainly first and foremost, would love to finance any loan funding with a core deposit growth, and that will be and continues to be our primary focus. As I mentioned, we not necessarily going to go pay up for deposits, but it is as Tim mentioned on a combined 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 investment portfolio that that continues, as you know, we historically have built it with a cash flow in mind. So that cash flow says about $18 million, $20 million a month that is projected for the next 12 months or so. So that a nice source if need to be funding. Threes no loan growth as well. And then we certainly have so little bit more excess liquidity left from as you know, we didn’t deploy that. So those are kind of the three main sources in near term.
Kelly Motta
Got it.
Aldis Birkans
It still says that 84% loan deposit ratio, I think, historically we’ve bumped up to 95. I think that probably where we feel comfortable to go to when we build out fully leveraged the balance sheet. So certainly don’t look to breach the 100% loan deposit ratio but we still have some room to move there, too.
Kelly Motta
Maybe last question from me, has to do with asset sensitivity. I really appreciate the guidance around the margin for 4Q. There is some the full quarter impacts of both deals coming through on that. Just thinking kind of on a go forward basis based on kind of your setup I would assume you’d still be asset sensitive and maybe it’s the deals keeping you more steady next quarter. But just wondering kind of from a high level is what we should be thinking about more neutral to rising rates going forward or any help on that would be great.
Tim Laney
Sure. No, we continue to be asset sensitive, not as much as we were a quarter or two ago. Some of the assets sensitivity come out as low the cash which a big chunk of the asset sensitivity was sitting in cash, right. So to the extent that cash has been invested in a fixed rate loan that been taken off the table locked in very good yields now. so on, but we still both between the two banks I’d say Rock Canyon was more asset sensitive, given the nature of their business of SBA. Bank of Jackson Hole a little less asset sensitive than us. So on net basis, I think they kind of compliment on us 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 let’s say two quarter years ago.
Operator
Well take our next question from Andrew Terrell with Stephens Inc. Please go ahead.
Andrew Terrell
Thanks for the time today. I don’t want to beat a dead horse. So maybe just to start on the margin. Aldis do you have what the margin was the NIM in the month of September?
Aldis Birkans
It was slightly about 4%.
Andrew Terrell
And then, can you just remind us was the Bank of Jackson Hole how accretive or dilutive that was to the margin just pro forma?
Aldis Birkans
So Bank of Jackson Hole didn’t come on the books until October 1. So it was neither, it was not. The Rock Canyon bank out and in the net interest income line, approximately $3 million to $3.5 million.
Andrew Terrell
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, capital is still in a pretty solid position. Tim can you maybe just update us on how you’re thinking about your capital positioning from here. And then can you remind us if there’s any buyback in place, and whether or not you have any appetite there moving forward?
Tim Laney
We will certainly maintain optionality around buying and shares. And we happen to believe that were going to be generating very strong earnings that would support a meaningful move in stock price and in 23, and should the market move against us and we have an opportunity to buy well pursue that. But we also remain focused on some other Ill 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 couldn’t be more pleased with the progress the team is making on that front. So I guess it might be helpful to talk about what were 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 of call it less than $1 billion banks that 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 realize some accretion of earnings over a couple of years as a result of expense savings. Any bank acquisitions will be strategic, will be in growth markets will fit our culture and our approach to underwriting credit. And outside of that will be focused on other specialties, specialty businesses that would benefit both the core bank to unify. So I know Andrew, that probably a little more than you were looking for. But that about as much detail as I provided in a while.
Andrew Terrell
No. That was a great color. I really appreciate it, Tim. Okay, and then if I can ask just one more on the loan growth this quarter, did you see any improvement in line utilization? Did that play much of a role in the strong level of growth and then — where just utilization sits overall? How that compares to pre-pandemic and then your outlook for commercial line utilization?
Tim Laney
Yes, so on page 10. On the long table, you can see in a footnote that details last five quarters of line draws that we see. You can see was a bit elevated this quarter. We are higher than historically, but I’ll say that we both just as many commitments. So the line utilization itself, the way we measure for commercial, all of our commercial lines is sitting at 62%. And that been right where we historically been on average.
Operator
Well take our next question from Andrew Liesch with Piper Sandler. Please go ahead.
Andrew Liesch
I’m thinking quarter ago you mentioned there’d be a couple million dollars per quarter of to unify expenses in the third and fourth quarter. Did that will also realized in the third quarter?
Tim Laney
Third quarter, it was about $1 million stuff the unified related $1.1 million to unified related expenses embedded my guidance is in continuation of that and slide growth. And then, as we entered the 2023, I’ll be more detailed on that projection in Januarys earnings call.
Andrew Liesch
Got it. And then on the fee income guide, does that include both acquisitions at 15 million to 17 million?
Tim Laney
In terms of guidance, it does, it does. So in terms of certainly be seeing the mortgage continue to slow down. So it reflects that in the third quarter, we had the unrealized gain a pickup in equity method investments. So not counting and not necessarily repeating. And that why you can see a little bit of a step down there, but it does include all banks.
Andrew Liesch
Got it. Make sense. You’ve covered all my other questions. Thanks, guys.
Operator
Well take our next question from Jeff Rulis with D.A. Davidson. Please go ahead.
Jeff Rulis
Thanks. Just a couple of follow ups. I don’t know if you’ve referenced this. Just wanted to confirm the thought of as you close the year end, certainly looks like you’d stay below 10 billion. Is that fair to assume?
Tim Laney
Well, on a pro forma basis, as we identified in the earnings release. On day one, we were $9.4 billion assets as bank apply the company to grow $600 million, which I at this point say that we will stay below 10. Plus back to the optionality and flexibility I think back to being why we are so cautious and prudent on deposit betas that allows us to make sure that we make all the right calls.
Aldis Birkans
And I’ll just remind everyone around the timing of crossing over the 10 billion threshold in terms of impact on any fee income. So really once, when we do cross and again, it doesn’t look seem likely for at the end of both for this the end of this year. So it’s really 15 months out. But in today’s run rate basis, it be impacting us about $8 million to $9 million interchanging income from Durban, which is suddenly like 2% of October revenues. So very manageable amount.
Tim Laney
Yes. I think the real point is that you’re talking about an impact that would be 15 months out in terms of regulatory standings, or standards around our core bank processes. That investment was made years ago. So were in a good plug, very good place with our regulators on that front in terms of infrastructure and position of the bank. And we do benefit from the fact that were not a heavily consumer focused institution. Hence, the smaller impact on the piece that Aldis mentioned.
Jeff Rulis
And just to clarify a couple of the guides. Aldis, the 64 million to 66 million on expense, again, that includes further merger expense. So kind of the core is closer to 60 all in.
Aldis Birkans
Of course closer to 60. So to build it up, you got it. So first of all, yes, it does include the what transaction expenses that we still yet to incur here in fourth quarter. If you take those out the quarters closer to 60. And to build that up, just for clarity. As we know, NBH we have been running on a standalone basis about 45 million quarterly run rate higher than the quarters when we had high mortgage commissions lower and now that it’s gone, gone, that components gone down somewhat upset by the unify components, so call it $45 million, which implies about call it 15-ish or so million dollars of between the two banks. They have been running with a pre-purchase or pre-acquisitions. They’ve been running 16 million to maybe even 17 million trend. So we already incorporating about 10% to 20% cost savings here in fourth quarter and certainly that not done yet there. So hopefully helps.
Jeff Rulis
No. That was more than I bargained for. I appreciate it. And then just also on the margin guidance. I can’t remember Aldis are you including the assumption of Fed hikes still kind of consensus view of still come year-to-date in that fourth quarter guide margin.
Aldis Birkans
Yes. It’s all inclusive. Let’s put it this way. Because I mean, again, just for clarity perspective, for example, for the deposit side, and if we were to combine both Rock Canyon and Bank of Jackson Hole cost of deposits, which came on between 40 to 50 basis points to our 18, certainly, that will have an impact in itself too just in terms of forecasting and projecting for fourth quarter deposit beta still look like they 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, and including whatever the auctions may be coming.
Tim Laney
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 a scale from those banks into the rest of 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 into those markets with those banks. So my full expectation is that we will see the cost of deposits in those markets actually come down from on a relative basis from where they had operated historically.
Operator
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.
Tim Laney
Well, I’ll just simply say thank you. I do want to thank all of my teammates again for just delivering what I view is brilliant results and more to come folks. We’re excited about our future. Have a good day.
Operator
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 you very much and have a great day. You may now disconnect.
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