Good morning, everyone, and welcome to the National Bank Holdings Corporation 2021 fourth quarter earnings call. My name is April, 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 call is being recorded for replay purposes. I would now like to remind you that this conference call will contain forward-looking statements, including, but not limited to, the statements regarding the company's strategy, loans, deposits, capital, net interest income, non-interest income, margins, allowance, taxes, and non-interest expenses. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties, and other factors which are disclosed in more detail in the company's most recent filings with the U.S. Securities and Exchange Commission.
These statements speak only as of the date of this call, and National Bank Holdings Corporation undertakes no obligation to update or revise these statements. In addition, the call today will reference certain non-GAAP measures which National Bank Holdings Corporation believes provides useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the investor relations section of www.nationalbankholdings.com. It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman, President, and CEO, Mr. Tim Laney. Please go ahead.
Thank you, April. Good morning, and thanks for joining National Bank Holdings fourth quarter and full year 2021 earnings call. I'm joined by our Chief Financial Officer, Aldis Birkans. We finished 2021 with record earnings and strong momentum as we enter the new year. Our team is delivering record levels of loan growth, record levels of low-cost deposits, and pristine credit quality. We benefit from operating in very attractive markets, and our focus is on earning the full banking relationship of our clients. We continue to realize tremendous opportunity to grow our base of small and medium-sized business relationships, and we have a pipeline that continues to expand at an impressive rate. We're well-positioned to benefit from rising rates, and I'm pleased to share that outside of our investments into 2UniFi, we believe we can hold core expenses flat to 2021 levels.
On that note, I'll turn the call over to Aldis for more detail on our fourth quarter financial performance and 2022 expectations. Aldis?
All right. Thank you, Tim, and good morning, everyone. As always, during my comments, I will cover the financial highlights for both the fourth quarter and the full year, as well as share our guidance for 2022. Consistent with our past practice, our guidance does not include any future interest rate policy changes by the Fed, nor does it include any large yield curve changes in general. As we reported in last night's release, we had an excellent fourth quarter as we delivered net income of $22.8 million or $0.74 per diluted share. For the full year of 2021, we reported a record net income of $93.6 million or $3.01 per diluted share.
Although we carried an average excess cash balance of approximately $750 million throughout the year, the full year's return on tangible assets was 1.37%. Despite the high levels of excess capital, the return on tangible common equity was 12.87%. As Tim already discussed, we are very pleased with the strong loan growth during the second half of 2021 and the continued performance of our teammates in building robust new client relationships. During the fourth quarter, our non-PPP loan balances grew a strong 13.4% on an annualized basis. The fourth quarter's loan fundings were $475.4 million, which was our second consecutive quarter of record loan production. The loan growth was broad-based, with most asset classes and geographies contributing to the loan balances.
Just as important, we entered the new year with strong prospects for continued loan growth. We expect to sustain this current momentum and deliver 10%-12% loan growth for the full year 2022. With regard to PPP loans, we ended the year with $21.7 million in outstanding balances and approximately $600,000 in unrealized PPP fees. We expect most of this to clear our balance sheet during the first part of 2022. Turning to deposits. During the fourth quarter, our total average transaction deposits grew 6.1% annualized as compared to the prior quarter. Core transaction deposits grew 14.2% as compared to the average balances during the fourth quarter of 2020.
The total cost of deposits decreased another 3 basis points to 18 basis points this quarter, and we project the deposits to settle at the 17-18 basis point level for 2022. Again, this projection does not include any interest rate increases. The fourth quarter's fully taxable equivalent net interest margin was 3.03%, an increase of 10 basis points from the prior quarter. This quarter's net interest income benefited from $1.8 million in PPP fees and $800,000 of accelerated mark accretion from our acquired loan portfolio. Looking ahead, our balance sheet is well positioned to profit nicely from any interest rate increases by the Fed. Our balance sheet is asset sensitive, and our annualized net interest income is expected to grow 5.4% in a 100 basis point rate increase scenario.
Our asset quality remains strong with another quarter of solid reductions in non-performing loans and just 2 basis points of annualized net charge-offs. For the full year 2021, our net charge-offs were just 3 basis points, and during the year, we reduced NPLs and NPAs 47% and 29% respectively. The fourth quarter's provision expense of just $132,000 was a result of the reserve requirements for our loan growth being partially offset by our strong asset quality and an improved economic outlook in the Moody's forecast in our CECL model. As a result, our year-end ACL to total loans, excluding PPP, was 1.11%. Total non-interest income for the fourth quarter was $22.2 million or a $5.3 million decrease from the prior quarter.
As expected, residential banking revenues decreased $6.2 million, driven by a seasonal slowdown during the fourth quarter. We do continue to see strong purchase market activity in our geographies and expect that to carry into the new year. During the quarter, we also realized a $1 million gain from the continued disposition of our consolidated banking center buildings, as well as a $2 million pickup in our equity method investment funds. For 2022, we project our total non-interest income to be in the range of $92 million-$98 million. Our core banking fees are projected to continue to grow in the slow single digits. However, we do expect a slight mortgage margin compression given the recent increase in the mortgage rates. Mortgage volume projections are in line with Mortgage Bankers Association outlook.
Total non-interest expense this quarter was $44.5 million, a decrease of $6.8 million from the prior quarter. The decrease was driven by lower mortgage-related compensation and a $700,000 gain realized through OREO property resolutions. Also, as a reminder, during the third quarter of 2021, we incurred $2.4 million in transaction expenses related to Finstro and Figure Technologies. This was part of our 2UniFi initiative. Looking ahead for 2022, we project approximately $4 million-$5 million in expenses related to the 2UniFi ecosystem build-out. Inclusive of this investment, the total non-interest expense is projected to be in the range of $189 million-$193 million.
As Tim already covered, absent our investment in 2UniFi, and despite the inflationary pressures, our core expenses are expected to remain flat to the prior year. When projecting the 2022 effective tax rate, we expect it to remain around 19%. As always, this projected rate excludes the FTE adjustment on interest income. In terms of capital management, during the quarter, we had purchased another $17 million of NBHC stock. As a result, the fully diluted share count for 2022 is projected to decrease to around 30.5 million shares. Our capital ratios remain strong at 10.39% Tier 1 leverage ratio and 14.26% common equity Tier 1 ratio. Finally, even with our stock buyback activity, our tangible book value per share increased $0.13 this quarter to $24.33.
Tim, with that, I will turn it back to you.
Thank you, Aldis. I also wanna thank my teammates across our company for their focus on caring for our clients and for their focus on taking care of each other. The thoughtful actions of my teammates are making our company stronger and producing record results. In 2022, we expect our core banking enterprise to continue to grow earnings both organically and through disciplined acquisitions. We've also challenged ourselves to further diversify and grow our core bank earnings stream with an expectation that we'll begin delivering incremental results later this year. Now turning to 2UniFi. Our vision is to create a national platform that's the equivalent of an Amazon Marketplace for financial services. We're focused on providing small and medium-sized businesses, or SMBs, with alternative digital access to a robust array of financial services.
These services will address borrowing, depository, and cash management needs, while also providing world-class information management and access to blockchain payment tools. We believe we're positioning 2UniFi to provide SMBs with unparalleled digital access to financial services, real-time information, and blockchain solutions that in turn will reduce stress and save business owners and operators precious time and money. Earlier this week, it was announced that NBHC completed a first-of-its-kind transaction over the Provenance Blockchain. We believe that this work, in partnership with a consortium of other banks, will begin to usher in a range of lower cost payment and information management solutions that can be game changers for many small and medium-sized businesses.
This is just one example of how we believe 2UniFi will provide groundbreaking financial and information management solutions for business. I really do want to thank you for your interest in our company, and we look forward to your questions this morning. April?
Thank you. If you would like to ask a question, simply press the star key followed by the digit one on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star one at this time. We'll pause for a moment. We'll first hear from Jeff Rulis of D.A. Davidson.
Hi, Jeff.
Good morning. Hello. Tim, just a question on the Finstro and Figure impact. Aldis outlined the build-out cost. Don't know if it's too early to say what the revenue impact could be on 2022 and/or 2023, if you've framed up anything, initially.
We've not framed anything up that we're prepared to share publicly at this point. You know, I am very optimistic about the pace at which we're seeing, in particular at this point, the Finstro partnership evolve. I would certainly put it in the category of examples that we're very focused on when we talk about delivering incremental results. Those are incremental to, you know, anything that Aldis has shared with everyone this morning. You know, we're also looking at some really interesting SBA-related market opportunities. You know, frankly, as a result of this workaround to 2UniFi, we're beginning to recognize use cases related to available technology that we believe can both reduce core expense and deliver incremental revenue. More to come.
No, we're not ready to put explicit numbers around those expectations, but it is an intense focus and something we're quite optimistic about.
Got it. Appreciate it. Just jumping to another topic. Aldis, you know, in the release, you talk about the cash deployment into loans, and you look at sort of cash on the balance sheet quarter-over-quarter, you still got a big balance there. You know, are we supposed to read into that what you did spin off of the securities portfolio in the quarter was. In other words, the cash build would have been greater had you not put it in the loans is question one. Two, could you remind us, I think you framed up what if you were to return to normal cash levels, what would be the impact to the margin? Thanks.
Right. Taking the first question first. Really, if you look at the margin table, you can see that actually on average basis, we did deploy about $100 million into loans on the cash. The year-end balance sheet clearly got benefit from some late in the year cash movements and deposit movements. That's one. In terms of how much that excess cash today is weighing on the margin calculation itself, it's about 30 basis points.
that would return, I mean, what's the comfortable cash balance that you.
Yeah.
Is that zero?
We typically run our cash balance in terms of free available cash between $25 million and $50 million at the Fed. You add in the cash letters and vault money and ATM money, it's about $100 million to $125 million on the balance sheet, we can see on the top of the slide is what the raw cash typically would be.
Okay. Last one, if I could. Just the rotation of what you saw out of non-performing into OREO, could that just be one credit or any shift within that? Total NPA is pretty flat, but the shift within that, any color?
Yeah. That's you got it. It's one credit, and it's actually an SBA-related loan that is working through the process moving from NPLs into OREO. In addition to SBA coverage, obviously, it's extremely low LTV type of thing. We expect no loss. As in many cases, and frankly, this last quarter being another one of those where things go through OREO, almost more often than not, we end up with a recovery on those. This is just one loan going through the process.
Got it. Okay, thank you. I'll step back.
Thank you, Jeff.
Next we'll hear from Andrew Liesch of Piper Sandler.
Andrew, good morning.
Good morning, guys. Morning. Question on the NII guide on the 100 basis point rate up scenario. Clearly, a nice benefit there because we're also in growth mode and are doing some interesting things on the fintech front. My question is, how much of that boost do you think falls to the bottom line or maybe accelerates other investments into the franchise?
I think in terms of how I guided for this year, all of that falls to the bottom line because the investment into 2UniFi, what we've circled out then as part of the expense guidance already is $4 million-$5 million. Unless there is accelerated investment or change of strategy and additional things we can develop right now, all of that would be accretive to us.
Andrew, it's such an important question, and I think it offers us this opportunity to clarify. We're going to manage with great discipline the pace of our investment into 2UniFi. Should we find a need to accelerate investment, we will find opportunities in the company to bring down expense in other areas. I just wanna be very black and white about that. You know, we'll continue to look at, for example, our brick-and-mortar distribution network for opportunities to create greater efficiencies. We feel like our estimates around investing into 2UniFi are very tight. Again, our commitment is should we, for some reason, discover the need to accelerate our pace of investment, our discipline will be around offsetting that investment through action on other opportunities.
Got it. That's really helpful. Just at this level with the stock here, what's the appetite for more repurchase activity?
I'm pointing at Aldis, and he's pointing at me. I think what we would say is, I'll continue to be opportunistic and you know, we have a threshold and discipline around, in our mind, the pace at which it would take to earn back any tangible book dilution. We've adhered to that. Obviously, we've benefited from that discipline, and we'll just have to watch what happens in the market because we obviously are very optimistic about where this company can continue to go with its earnings. I guess I'll leave it at that. That's a non-answer answer. Sorry, Andrew.
No, that's still helpful. All right, I will step back. Thanks for taking the question.
You bet.
Next, we'll hear from Kelly Motta of KBW.
Good morning, Kelly.
Hi, Tim and Aldis. Good morning.
Good morning.
I wanted to turn to loan growth. You know, you guys, it's so nice to hear about the 2UniFi stuff, but you also put up some really nice growth this quarter. Tim, I believe in your prepared remarks you had said, and it was pretty broad-based and across geographies as well. I was just wondering if you could give us a bit more color on, you know, how much of this is maybe winning new business versus economic growth in your markets versus maybe line draws normalizing. Just any help there and kind of how that fuels your outlook would be great.
Yeah. Great. Yeah, great question, and I think you really hit all of the key categories there at the end. I mean, you know, we're excited about what our teams are doing around taking market share. You know, we feel like in certain tranches of the small and medium-sized business arena, those businesses are not getting the attention by some of the larger institutions in the country that perhaps they once did. That's translating into opportunity for firms like ours who really focus on that business. I am really pleased with the discipline our teams are showing. We were back in our offices, if you think about it, in you know July and no later than Labor Day of 2020. We've been engaging. You know, we've done it with sensitivity.
We've been careful, but frankly, a lot of those prospects that are now clients or in the pipeline to become clients are folks that we have engaged with face-to-face. You know, when a business is making an important decision around moving their banking relationship, we found that it does make a difference to be able to engage directly and work through that transition and demonstrate that we know and understand their business. Again, I couldn't be more pleased with our team's focus on taking market share. Finally, we certainly have to acknowledge that strategically, we put ourselves in some of the absolute best markets in the United States. I mean, they continue by virtually any economic metric to outperform U.S. national averages.
That represents wind at our back, and we're grateful for it, but it was by design. You know, we'll continue to work very hard to expand in these markets because they continue to grow and show promise.
Thank you, Tim.
By the way, both Aldis and I alluded to this, all of that translates into coming into 2022 with very, very solid momentum. That's what is really encouraging. We are very, very pleased with the momentum we're seeing as we come into this year.
Great. Maybe if I could slip in a last one. You also mentioned potential M&A in your prepared remarks, I believe on the traditional side. Just wondering what the appetite is there and kind of how the pace of conversations have been.
Yeah. You know, we're constantly in a state of working to develop relationships with groups that we think would be powerful partners. You know, we're going to maintain our discipline around ensuring that anything we might do on that front would be well met by all of our investors. We hold ourselves to a high standard there. Our fundamental belief is that should any company consider selling themselves to us and becoming part of our company, that as investors, it's in their best interest to construct a transaction that's going to be well received in the marketplace. We're not going to do anything unless we believe cultures mesh well and unless we believe that there are incremental opportunities to create revenue.
I can tell you what's as important is we've made a very clear decision that what we're not going to do is play in that space where you're simply making an acquisition and only looking for expense takeout. If a target doesn't bring incremental capability and incremental opportunity to the table, it's not something we'll focus on. Kelly, I've stopped. I'm not sure if you have any other questions, but that's where I would leave it.
She may have dropped. We'll move on to Brett Rabatin of Hovde Group.
Hello.
I joined a few minutes late, so you may have covered some of this, but wanted to, I guess first, just talk about your assumption on deposits. You know, you guys like many have had your deposits increase about a third, you know, post the pandemic or through the pandemic. I'm just curious, as you look out, you know, on the horizon, what your assumption is for the deposit base. You know, how much of it is sticky and kind of how you think liquidity could drain from customers as you think about the economy going forward.
Great question. I'll begin and then turn it to Aldis for more detail. We've talked about this in on prior calls, and what I would tell you is I do think that banks could be lured into complacency around these excess deposit balances that the industry has experienced. We fight against that fundamentally by also really leaning into accountability around the development of new relationships. It's one thing to see this, what could be obviously a temporary increase or flex in balances. What we get excited about is the expansion and growth of new relationships, which speaks to our focus on taking market share in growing markets. Now, having said that, to come back to the details around your question, I'll throw it to Aldis.
Yeah. That's why we didn't necessarily provide explicit guidance on deposit growth itself, as we are rebuilding that relationship and client base behind it. You know, over the last year, fourth quarter to fourth quarter transaction deposits did grow 14%. I think it's that pace most likely will slow down into mid-single digits, in my opinion. Again, some of the how the liquidity withdrawals by the Fed and maybe quantitative tightening will play out, it's hard to put a you know very hard estimate on it.
Okay. Fair enough. Then again, you may have covered this, but line utilization, I'm curious how that trended during the fourth quarter and kind of how you see that playing out over the next few quarters.
Yeah, that's a part of our loan growth this quarter. It was also the line utilization did pick up. I'd say our lines returned to kind of long-term averages at the end of the fourth quarter. It is in our loan tables. You can see how the quarter-to-quarter line utilizations benefit or take off the loan growth. This last quarter was a good line utilization. It seemed like clients were starting to draw down.
Okay. Great. Appreciate the color.
You bet. Thank you.
Next, we'll hear from Andrew Terrell of Stephens.
Hey, guys. This is John Walsh.
Hi, Andrew.
Hey, guys. This is John Walsh in for Andrew. Congrats on a great quarter.
Thank you, John.
Aldis, I guess, quick question on the deposit base again. I guess how should we be thinking about deposit betas at NBHC in a rising rate environment? Is there any reason to think that your beta in this cycle will be dissimilar to last cycle? Can you remind us of like what you assume in your disclosed NII sensitivity for a deposit beta?
First of all, if you look at our deposit construction for us, 40% of our deposits, you know, are in non-interest-bearing deposits. That bodes well for any rising rate environment to begin with. In that 5.4%, 100 basis points rate shock scenario that I talked in my prepared remarks, embedded there is about 30% deposit beta on total deposits. But again, if you back into what does that mean for interest bearing deposits, that's actually 50% deposit beta.
To kind of get just to your question, I think it is quite conservative because if you go back in the last tightening cycle, our deposit beta was between 10%-25%, depending on the period when you measured it. We are quite conservative the way we model and project this.
Well, just for the benefit of folks that have joined us on the call today, translate that 5.4% at 100 basis point rate shock roughly to dollars.
Yeah, that approximately would be $12 million annualized pickup if after a 100 basis point increase in Fed funds rate.
Got you. That's helpful. I appreciate the color. One last one. Can you remind us of the repricing dynamics of the loan portfolio? How much is floating rate, adjustable, fixed? Do you guys have loan floors in place on any of those floating rate?
As in the past, our loan book is approximately 40%, call it 40%-42% variable rate. That is variable index, either prime, LIBOR or SOFR these days. Of that, just only 15% of that only is with rate floors that would not lift, call it, for the first 50-75 basis points. The vast majority of our LIBOR prime loans will have an immediate benefit as the rates move up.
Awesome. I appreciate the color. That's all I had. I'll step back.
All right. Thank you, John. April?
Thank you. I am showing we have no further questions at this time. I would now like to turn the call back over to Mr. Laney for any closing remarks.
All right. Thank you, April. As always, I would just thank you for your interest in our company. We certainly are open to any follow-on questions, should anyone have them after this meeting. Again, thank you and have a good day. Bye now.
This concludes today's conference call. If you would like to listen to the telephone replay for this call, it will be available beginning in approximately four hours and will run through January 26th, 2022, by dialing 888-203-1112 and referencing passcode 2454367. The earnings release and an online replay of this call will also be available on the company's website on the new Investor Relations page. Thank you very much and have a great day. You may now disconnect.