Good morning, everyone, and welcome to the National Bank Holdings Corporation 2022 first quarter earnings call. My name is Keith and I will be your conference operator for today. At this time, all participants are in 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 company 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, 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, this call 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.
Thank you, Keith. Good morning, and thank you for joining us as we discuss both National Bank Holdings' First Quarter 2022 Financial Results and last evening's announced acquisition of Utah-based Rock Canyon Bank. I'm joined by Aldis Birkans, our Chief Financial Officer. With respect to the first quarter, our focus on small and medium-sized businesses operating in great U.S. markets continued to produce solid results. Our teams delivered record first quarter annualized loan growth of 15.8%. Most important, the newer re-originations remain granular and diversified in nature. We're working with businesses whose balance sheets are very strong and well-positioned for economic shocks. To that end, we ended the quarter with record low non-performing assets and positive asset quality trends across the board. Our focus on earning the full relationship of our clients resulted in attractive growth in transaction deposits and treasury management fees.
I'll add that we feel very good about our new market share gains and our momentum on that front. Finally, it's noteworthy that net interest income is well-positioned to benefit from rising rates, and more broadly, we believe our balance sheet is well-positioned to avoid major AOCI shocks. Turning to last evening's announcement on the acquisition of Utah's Rock Canyon Bank, this move accelerates our strategy to expand in the Salt Lake City region, while also adding a best-in-class SBA program that is scalable across our geographic footprint and to 2UniFi. Rock Canyon is the number one bank originator of SBA loans in the state of Utah. We fully expect to deliver increased fee income from this impressive capability.
I do wanna take a moment and recognize and thank the Roney family for the great bank that they built and for their willingness to establish this new partnership on an exclusive basis. When coupled with our recently announced acquisition of the Bank of Jackson Hole, we have added scalable fee income capabilities in the SBA and wealth management areas while expanding into some of the most attractive markets in the United States. On that note, I'll turn the call over to Aldis for more detail. Aldis?
All right. Thank you, Tim, and good morning, everyone. I will cover the Rock Canyon Bank acquisition deal metrics and then provide an update on our first quarter's results, as well as an update on our full year 2022 guidance. We are pleased to announce another acquisition in a short period of time. We believe the combination of NBH Bank, Rock Canyon Bank, and the previously announced acquisition of Bank of Jackson Hole results in a highly diversified, well-capitalized balance sheet and adds multiple additional revenue streams through SBA loan production and wealth management business. With regard to this acquisition, Rock Canyon Bank is an $800 million asset bank that has $500 million in loan balances and $740 million in deposits. They operate in the fast-growing Salt Lake City and Provo region.
Based on the April 14 , 2022 NBHC stock price of $38.69, this is a $136 million transaction. As part of the total consideration, NBH will issue a fixed amount of 3.1 million shares and pay $16.1 million in cash. This represents approximately 1.8 times Rock Canyon's tangible book value and results in a 2.5-year tangible book value dilution earn back for NBHC shareholders using the crossover method. As always, we have been realistic and appropriately conservative with our modeling assumptions, and we have not built in any additional revenue synergies into our financial model. Now turning to the first quarter's results.
For the first quarter, NBHC earned net income of $18.1 million, or $0.60 per diluted share. We grew our loan book a strong 15.8% annualized, which as always, was led by growth in our commercial loan book of 19.7%. During the first quarter, we grew our average transaction deposit balances by 4.9% annualized and continued to maintain diligent expense control with total non-interest expense decreasing by $0.4 million on a linked quarter basis. We discussed during our last earnings call, we entered the year with strong loan pipelines. This clearly contributed to the record first quarter loan fundings and the second highest quarter of loan production in our company's history.
During the quarter, we funded $419.7 million in loans, and we have funded nearly $1.7 billion in loans over the past four quarters. Our pipelines remain strong. Looking ahead, while multiple geopolitical and inflation uncertainties could weigh on the U.S. economy, we feel comfortable with our prior loan growth guidance of 10%-12% for the full year. At this point, we see enough momentum to deliver or even beat the high end of this range. The first quarter's fully taxable equivalent net interest margin was 2.9%, and the fully taxable equivalent net interest income was $48 million, as all material PPP fee impact was already realized last year.
While the impact of March's 25 basis point increase in the federal funds rate had a nominal impact on our first quarter results, as Dan mentioned, NBHC's net interest income will benefit nicely from this and any further short-term interest rate increases in the coming quarters. Going forward, we project net interest margin to expand to 3% in the second quarter of this year and to retain positive trends in the following quarters. In terms of our asset quality, it remains strong with positive trends across the board. The first quarter's net charge-offs are just 5 basis points annualized. Non-performing assets decreased another 4 basis points, and non-accrual loans remained at record low 24 basis points of total loans. The strong asset quality, along with the current credit outlook, resulted in a $322,000 loan loss allowance release this quarter.
The resulting allowance to total loans at the quarter end was 1.04%. Total first quarter's non-interest income was $19.1 million. Both service charges and bank operating income were up nicely and increased 3.8% on a year-over-year basis. The first quarter is seasonally slow for these line items, but we continue to experience nice growth on a year-over-year basis. Mortgage income was clearly impacted by the rapid increase in mortgage rates. Having said that, when breaking down our mortgage revenues between volume and rates, it's notable that our lock volume during the first quarter was 6% higher than during the fourth quarter of last year. On the other hand, the margin compression resulted in a $721,000 decrease in our mortgage revenues on a linked quarter basis.
Looking ahead, for the full year 2022, we are adjusting our fee income guidance to $78 million-$82 million. The decrease from the prior guidance is entirely due to the impact of higher mortgage rates are having on our mortgage revenues. We expect net interest income expansion and expense control to mitigate the decline. Turning to expenses. Non-interest expense this quarter was $44.1 million, a reduction of $423,000 from the prior quarter. This was a clean quarter for our core expense run rate, and a decrease in the compensation line was mainly due to fewer payroll days during the quarter. For full year 2022, we are lowering our guidance for non-interest expense to be in the range of $183 million-$187 million.
This guidance is for our core operations and does not include M&A related transaction costs, which, as a reminder, between the two deals are projected to be approximately $23.5 million on pretax basis. During the first quarter of 2022, we incurred approximately $250,000 in transaction related costs. Our capital ratios continue to remain strong at 10.5% Tier 1 leverage ratio and 13.9% CET 1 ratio as of the quarter end. On pro forma basis with the two announced M&A transactions, we will continue to maintain strong 9% Tier 1 leverage ratio and 12% CET 1 ratio, still providing us with plenty of optionality. With that, I'll turn it back to you.
Thank you, Aldis. We clearly believe the acquisitions of Rock Canyon and Bank of Jackson Hole represent attractive uses of excess capital. My expectation is that we will enhance our operating leverage while also growing new diverse revenue streams and attractive low-cost deposit bases. We'll remain focused on expanding in fast-growing and strategically important markets while adding capabilities that will be leveraged across our geographic and 2UniFi platforms. On that note, Keith, I'll stop and ask you to open up the lines for questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, 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'll take our first question from Brett-
I'm sorry.
Excuse me, tongue-tied. Brett Rabatin from Hovde Group. Please go ahead.
Hey guys, good morning.
Hey, good morning.
Congrats on another deal. Two questions around the transaction. One, obviously, you know, the other deal is a big opportunity on the trust and asset management side, and this one is from a fee income perspective with SBA, and looks like they did $12 million of fee income last year. Can you maybe quantify the SBA opportunity, you know, as you see it being placed on your footprint or your operations? And then can you talk about their loan portfolio yield, which I think is about 7%, so it's obviously a little higher yielding portfolio?
I'll take the second part first. Yeah, their portfolio is yielding nicely near 7%. They've been able to maintain it through this extremely low rate environment. Which is one of the things we liked about it, there's best practices to be learned from that group and they've been able to maintain it as recently as the last quarter, this quarter as far as we can tell in terms of production levels. Those are nice yields. In terms of the SBA loan production, they originate near $200 million in SBA production a year, which would be nice supplement to what we already do to, you know, call it $1.7 billion loan production over the last four quarters for us.
What we are excited about is the ability to transition, as Tim mentioned, the best practices that we see in their business across our footprint. Yeah. I would add that the way I think about it, and we're not ready to provide guidance around what we expect this to scale to, geographically and ultimately 2UniFi brand. What I would tell you is that we have a strong SBA business at National Bank Holdings focused on what I would say the more complex SBA transactions. What we are so very impressed with at Rock Canyon Bank, and it's the reason they are the number one bank SBA lender in the state of Utah, is they've really defined a very efficient process for addressing small, medium-sized business SBA loan needs.
Speed is a key here, but we've been very impressed with the quality of the administration and the underwriting around that work. We actually believe it'll add an alternative stream and an alternative process for kind of standard SBA business opportunities.
Okay. Just going back, all this on the loan portfolio yield, I mean, look at the regulatory filings, nothing stands out. What is SBA a big chunk of the 7% performance on the yield, or are there other things weighing in on that?
No, it's across the board. It's they have some ag, they have SBA, CRE, and all parts of the portfolio are, let's just say, accretive to our yields.
Okay. The guidance for expenses, you added a color there on the end about the expenses for these deals. Does the fee income of $78 million-$82 million, that guidance, does that exclude or include the transactions closing later this year?
That excludes. My guidance is purely on NBHC standalone basis. You know, we certainly will look to close and integrate these deals as quickly as we can. Until we have more clarity on our regulatory applications, we'll hold off on how much those deals will contribute this year. I did want to provide the expense guidance given that's likely to hit. The transaction costs will hit this year.
With that $78 million-$82 million, it would seem like you're implying that the mortgage recovers, you know, throughout the year in terms of revenues. Is that a fair assumption to make relative to the first quarter?
What I think the way I would look at it is, we're projecting the mortgage revenues to be for next couple quarters, be in line with the first quarter and then have seasonal slowdown in the fourth.
A last quick one, and I'll let someone else jump in. The tax rate this quarter obviously lower. Can you talk about the sustainability of the tax rate or any thoughts around that going forward?
Yeah, just given the quarter, the prior quarter came in, tax rate came down. I would put it closer to 17%-18% at this point in the full year. I think that will impact net income and taxable income will be these transaction costs, which is probably also a reason why first quarter is a bit lower, as we are starting to project the transaction cost hitting this year's taxable income.
Brett, I would remind you, as it relates to any step down in mortgage-related revenue, we've always viewed the mortgage business as a nice hedge to our commercial banking business, and we're certainly seeing volume ramp up in commercial, therefore, we expect the net interest income to continue to grow and would expect there to be some nice offset over the course of the year. So more to come on that front, but that's the way we've always looked at those two businesses and how they operate in a complementary fashion.
Okay. Thanks. Appreciate all the color.
All right. You bet, man.
We'll take our next question from Andrew Liesch with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good.
Congrats on another deal here, two in one month.
Thank you.
A question on the loan growth that Rock Canyon's been putting up. Looks like it's been pretty strong. Curious how much of that is from PPP? How much is it from retaining SBA loans? Are they selling all the guaranteed portion or are they retaining some of it? Just trying to get a sense of what growth could possibly be here from the acquired franchise going forward?
Yeah. The answer is kind of combination of all above. Their PPP presence wasn't in terms of on-balance-sheet growth, that material. For example, they had all of the PPP loans gone as of the year-end. In terms of historical growth, yes, they have been a solid double-digit growers on both sides of the balance sheet, actually, not just loans, but then deposits. The way we looked at it, we took it down to more of a my guided 2022 for NBH 10%-12% levels to be conservative, back to being conservative on our assumptions. That's how we modeled them going forward.
Got it. Okay. How does this bank affect your asset sensitivity? It seems like this available liquidity that they have, it should make NBH even more asset sensitive.
It is a fair assumption. Yes. They are sitting on $300 million of cash with no liquidity, no investment portfolio. Cash is clearly gonna provide a lot of asset sensitivity and a lot of opportunity for us in these higher rates as well. That's something that we like and frankly again, not modeled in any way or shape or form in our EPS accretion assumptions.
Got it. Okay. Just on their deposit base, looks like there's some jumbo CD and some broker deposits. Any discuss on the makeup of that? Do you intend to run those off, just given that the rest of it is pretty low cost funding and very core?
Yeah, exactly. I think that is more of a call it wholesale type of deposit inherited from years before that they have, such as broker deposits. Yeah, that is planned to be run off. We're not gonna, you know, we'll institute from that front. We'll have a very disciplined approach the way we've had it on our relationship building on deposit side with our clients and retaining core deposits.
Got it. Very helpful. That covers my questions. I'll step back. Thank you.
Thanks, Andrew.
Thank you.
We'll take our next question from Jeff Rulis with D.A. Davidson. Please go ahead.
Morning, Jeff.
Thanks. Good morning. You know, clearly there's a common thread with these last couple deals on the diversity of the fee income side. You know, I guess strategically, just trying to think about the opportunity. You not only retain, you know, what these banks do well. I think on both deals you've talked about how, you know, you could extend that to your legacy platform. Maybe just, and this may be oversimplifying, but if the bank is, call it, you know, 25% of revenues or fee income in a kind of a normalized mortgage environment, is there a way to kind of talk about what these banks do to you in the short term?
You know, say they're closed in early parts or well, later this year or early next year, what that target of fee income to revenue would be, and then fully flex what that could be? Again, apologize if that's oversimplifying, but just trying to get a sense for, you know, you retain the business of what you buy, but as you extend it to your platform, what that could be as well?
No, look, you're asking the perfect question. We're just not at a point where we're comfortable providing guidance. The framework that you're using to think about where this could go is exactly where our heads are at. We have no doubt that both capabilities, both the wealth management and this particular SBA capability, are going to very quickly contribute across the rest of our franchise. That will be a focus. I would also say we should not lose sight of, you know, the fact that this puts us in incredibly attractive markets, you know, whether we're talking about the wealth market of Jackson Hole, the growth market of Boise, or the expansion in Salt Lake City in the Wasatch region.
I would tell you, we believe we've been, as we always are, relatively conservative in our outlook for what these two great banks will bring to NBH.
Okay. Appreciate it.
That's a long way of saying we're on the same page, and we'll be coming back to you with guidance in an appropriate timeframe.
Makes sense. Okay. While on the deal, all this is just kind of housekeeping. Got the earn back on tangible book, just backing into the, do you have both a tangible book dilution as a percent and what would the CECL double count impact for this transaction be?
Yeah. The day one dilution is 4% on our tangible book, modeled as of December thirty-first jump off point of last year. In terms of double counting, right now what we are assuming that the double count is equal to non-PCD mark.
Okay. Maybe a last one. This is more broader. Things you've touched on before all this in the past. That margin of maybe get to 3% in the second quarter. What do you think that figure equates to? You've touched on, you know, liquidity weighing on that margin by a certain basis point. You know, is it if they're fully balanced and, you know, I know that's hypothetical, but do you have a figure that if you were to right size the balance sheet, what that margin how much underwater is that given liquidity? Thanks.
If right sizing, there could be two ways, right? You could add loans and increase the interest income or you could call it take out the cash and reduce cash. Reducing cash is the more conservative way to look at it. Right now in the first quarter, for example, it's around 30 basis points compression impact from cash. Next quarter, you know, when we report 3% let's say, which we're projecting, the cash projection impact still is around 26, 27 basis points. You know, our core margin would be 3.25%-3.30%, ex cash, excess liquidity. Does that help?
Great. Yes, that does. That's exactly what I was looking for. Thank you.
Yeah. Hey, Jeff. You know, you were asking about tangible book dilution or use of tangible book here. You know, as we look at a number of banks reporting 10%, 15% hits to their tangible book as a result of AOCI. You know, we feel pretty good about the use of capital here, particularly, you know, when you think about the accretion of earnings that we're picking up, we feel reasonably confident that this 2.5-year kind of earn back we're targeting is something that we'll beat. But it's interesting times to be thinking about deploying capital in this manner versus seeing it run down on something like an AOCI hit.
Yep. Good point. Thank you.
I'll add just to be more specific on tangible book value dilution. Day one, it's 4.6% to be precise.
Got it.
We'll take our next question from Kelly Motta with KBW. Please go ahead.
Hey. Hey, Tim and Aldis. Good morning. Congrats on the deal.
Thank you, Kelly.
Maybe sticking with capital, with the two deals pending, is it fair to say that you'll be out of the market for buybacks for the remainder of the year, at least while they're pending? Or do you have any stock plans in place that allow you to be active while those are ongoing?
I'll simply say that is not fair to say.
Got it. Okay, that's helpful. Circling back to the fee income guidance. I know a lot of the difference is just what's going on with the mortgage market. I don't believe you had much by way of the 2UniFi revenues coming in this year, but just wanted to confirm that and also, you know, see if you know, while the deals feel like they add some diversification that you can export to 2UniFi if the pending transactions at all in terms of implementing 2UniFi?
We really think at this point in 2022, the likelihood of seeing incremental contribution would come out of the Finstro partnership and investment, which will be a capability within 2UniFi. We do not expect to have enough of the framework in place with 2UniFi, nor enough time in terms of having closed these two transactions in 2022 to see a convergence of those capabilities in this year. Certainly over time, both of those capabilities and our need for those capabilities were strategic drivers of the acquisitions.
I'll add on the, you know, to be fair, on the other side of the statement on expenses, as we haven't had a whole lot of 2UniFi expense start hitting just yet either. If you look at the projection, it does imply a bit of a ramp-up on a quarterly run rate basis and a portion of that is based on 2UniFi build-out expense that I guided at the beginning of the year.
Got it. Okay, that's helpful. Turning to the NIM, you kind of helped with the component in the earlier question, but just wondering, with the 3%, how much of that is related just to the rate hikes we had and if you're building out any further rate increases into 2Q that help boost that number?
No, I mean, we can, as we historically have done, we deal with information that we know in not putting any forecasted or any expected rate hikes or for that matter, rate cuts when we do our projections. It is a true impact from the loan growth, right? I would not dismiss the loan growth. Our loan growth this quarter, this last quarter, while extremely solid, came in a little bit later in the quarter and didn't have a whole lot of benefit in the first quarter. Net interest income, which is just put that in perspective. For example, if our average balances for loan balances grew only $37 million.
If you look at our spot balances, netting all of the thing out, we jumping up $161 million higher than the prior quarter. There's a hundred and twenty, call it $120 million of earning asset balance day one in second quarter that is earning quite a bit more interest income. Then certainly the rate increase, I'm estimating about, you know, given that it was late in the quarter, again, March 16 increase, benefited about 2 basis points, maybe 3 basis points in the originated loan yield in the first quarter. I think we have about 5-6 basis points pickup in, again, originated loan yield from that in the second quarter.
Great. That's super helpful. Thanks, Aldis, and thanks, Tim. Appreciate it.
You bet. You bet, Kelly. Thanks for the questions.
We'll take our next question from Andrew Terrell with Stephens. Please go ahead.
Hey, good morning.
Good morning.
Congrats on the deal.
Thank you, Andrew. Good morning.
Maybe just first kinda quick question on acquisition. I think with both of these kind of in the fold, especially if you close before the end of 2022, and just given kinda some of the growth, it seems like you'll be pretty close to that $10 billion mark in total assets? I was hoping you had kind of the Durbin impact for the pro forma company, if you could disclose it?
We do. In terms of individual deal accretion numbers that we put in the two decks, they are viewed on a standalone basis, and we certainly don't trigger the $10 billion mark, nor do we on a pro forma basis just yet. There's a time delay, obviously, in terms of when the Durbin impact kicks in. Having said that, our estimate is on pro forma basis, on pro forma revenue basis, Durbin impact is only gonna be about 2 percentage points of total revenues once we cross $10 billion.
Okay. Got it. I appreciate it. Aldis, I wanted to clarify. I think last quarter when we discussed the expense guidance, it was exclusive of $4 million-$5 million of build-out costs related to 2UniFi, but it sounded like just a minute ago, the expense guidance, the updated guidance for $183 million-$187 million for this year included those costs. Did I hear that correctly?
The second part you did. The last year or last quarter, when I guided for full year, it also included. Both-
Okay.
Those are my prior guidance to this guidance is apples to apples reduction and both include the unified build-out costs.
Understood. Okay. I hear you on all of the loan growth commentary, and it sounds very strong. I was hoping you could speak to maybe how you're thinking about growth on the other side of the balance sheet, just from an organic standpoint and within the deposit book.
Well, I think our model serves us extraordinarily well with a focus on small and medium-sized business. It's so critical to have bankers that are rewarded and focused on capturing the full relationship of a client. Having the treasury management capabilities that allow us to compete with the majors has been a huge differentiator. We'll continue to watch our low-cost transaction deposit relationships grow. With that growth, we're talking about very sticky, low-cost attractive funding for the bank. As Aldis pointed out earlier, we've never been reliant on wholesale funding. It's not something we ever expect to have to do. Certainly with acquisitions like this delivering very attractive low-cost deposit basis, it just puts us in a room to take very nice, attractive low-cost liquidity and put it to work.
you know, I think the trap as we've discussed before that bank leadership teams fall into is simply looking at the kinds of stimulus related balances that are sitting on a lot of balance sheets and get complacent. I think what you've really got to do is be measuring new relationship activity. You know, are you taking market share? Are you capturing the full relationships of those clients? When you do that, I think it positions you well for the future.
That's very helpful. I appreciate it. If I could just sneak one last one in. I saw the bond book was built a little bit this past quarter. You still have a lot of excess liquidity on the balance sheet, and I know both of the announced acquisitions kind of improved that kind of excess liquidity position. Do the two announced deals and just given that fact, I guess, lead you to be more inclined to put some money to work in the bond book in future quarters, or should we think about the bond book as kind of static from here? Thanks.
Another great question.
That's a great question. I think it all depends. Certainly the yield curve backing up to the point where it is, it starts becoming more attractive, especially if you start thinking and believing in stagflation or a slowdown in the U.S. economy, and you start thinking that the rates are going long term. It's gonna go much higher. We will be optimistic, I would say. I think without these two transactions, less so.
With these two transactions coming on our books and knowing that we will receive that cash balances of each one of them, we might reinvest, let's say, some of that, their cash on our balance sheet and then absorb their cash, as a replacement in terms of our liquidity on day one, if that makes sense.
Yeah. No, it makes total sense. I appreciate you guys both taking my questions and congrats on another deal.
Thank you very much.
Thank you. I am showing we have no further questions at this time. I will turn the call back to Mr. Laney for his closing remarks.
Great. Thank you very much. I do wanna thank everyone that joined us today. We are clearly pleased to be at a point in the year where we've announced two incredibly attractive acquisitions, great new partners, great new teams. Look forward to working with our new teammates. We appreciate all the questions this morning. Wish everyone a good day and a good rest of the week. Thank you.
This concludes today's conference. If you would like to listen to the telephone replay of this call, it will be available beginning in approximately 4 hours and will run through April 24th, 2022, by dialing 888-203-1112 and referencing passcode 2525902. The earnings release and an online replay of this call will also be available on the company's website on the investor relations page. Thank you very much and have a great day. You may now disconnect.