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 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 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.
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're 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. 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 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?
All right, 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 of 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 Bank loan portfolio. Excluding these transaction-related items, our adjusted core net income was $25.3 million, or $0.80 per diluted share, which is a 16% increase over the prior quarter's adjusted results. Our pre-tax, pre-provision net revenue, excluding the transaction expenses, grew $11.3 million, or 38% on 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 $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 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 linked quarter basis. 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 2 basis points. Looking ahead for the fourth quarter of 2022, at this time, we project NBH's net interest margin to remain at around 4%. In terms of our asset quality, it remains strong with decreases in both delinquent and criticized loan ratios. The third quarter's net charge-offs were just one basis point annualized, and both the non-performing assets ratio and the NPL ratio remain low. During the quarter, we recorded a provision expense of $12.7 million.
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 Moody's forecast scenarios. As a result, our ACL ratio of total loans ended the quarter at 1.15%. Total third quarter's non-interest income was $17.4 million or a $600,000 increase from the second quarter. The continued slowdown 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-$17 million range. Non-interest 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. At this time, we are projecting to come in well below our total 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's expenses.
For the fourth quarter of 2022, we are projecting non-interest expense to be in the range of $64 million-$66 million. Included in this projection is an estimated $5 million-$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 are being 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 January's earnings call. Our capital ratios remain strong at 12.8% Common Equity Tier 1 ratio and 9.6% tangible common equity ratio. Our tangible book value per share was $22.40 as of September 30th, and it reflects the full impact of the Rock Canyon Bank acquisition.
We closed the Bank of Jackson Hole acquisition on October 1st, 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%, an increase driven by the higher than projected pre-tax income through September 30th. For the fourth quarter, we project the tax rate to return to 18%-19% range. We ended the quarter with 33.2 million shares outstanding. After incorporating the shares issuance for the Bank of Jackson Hole acquisition, we project the fourth quarter's average diluted shares to be around 38 million shares outstanding. With that, I'll turn it back to you.
Thanks, Aldis. We could not be more pleased with our recent acquisitions of Rock Canyon Bank and Bank of Jackson Hole. Both banks operate in very attractive markets, and each delivers 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 and the caliber of our new teammates. I believe these two acquisitions have the potential to meaningfully exceed our initial earnings expectations. 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 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 Jeff Rulis with D.A. Davidson. Please go ahead.
Thanks. Good morning.
Hi, Jeff.
Tim mentioned the rather nominal increase in deposit costs. Could you share with us again what your beta assumptions for the cycle on deposit betas are?
Yeah. Well, let me start by saying that we could not be more pleased with how we've positioned the balance sheet through the cycle and through all the excess liquidity that we gathered through the post-pandemic environment. As you recall, we maintained most of it 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. Looking ahead, we will not and we have not been price leaders on the rates.
If you look at our, we've talked about it before, via our relationship type of bank, we strive for a primary transaction accounts and we've been able to date manage our betas quite nicely. How it's gonna go from here, you know, certainly we will have to respond to markets as markets adjust. However, you know, we're not gonna be the price leader.
Okay. Should we expect a similar, I guess, 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'd probably be similar. If you look at our balance sheet composition, prior cycle, we had smaller DDA to total balance or noninterest-bearing deposit to total balance mix. Overall beta, you know, should be a little bit better if you look at the 40% noninterest-bearing deposit mix that we have today. Again, going back to the relationship-based model. Overall, I think might be slightly better, but you know, no reason to think that we would once this cycle is over be any different than before.
Okay. I guess leading to the margin discussion of around 4%, could you? I guess that surprises me that it just sort of is gonna flatten out here given the pace of the earning asset increase. I guess does that number include accretion the 4%? I guess, does that assume you see a pretty rapid increase in the funding or the you know, liability costs linked quarter?
Yeah. You kind of pointed out a few. 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. You know, certainly 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 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, some of deposit costs due. At this point, at best, incorporating all of that, it does feel like it's gonna be 4%. Again, it's just so many moving pieces that it.
I don't wanna. We'll be providing more guidance in 2023 for a full year for next year.
Okay. Thanks, Aldis. Tim, I wanted to check in with you on. I know that it sounds like some more guidance for 2023 is coming, but just a big picture think about 2023 organic growth. You know, early in the pandemic, your bank was pretty cautious. Unique times, but lending was, you know, 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 2023?
Jeff, great question. It begins with a bias toward more conservative underwriting in any case 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 a global cash flow basis for any borrowing client using a double-digit interest rate scenarios. Again, would hope that doesn't come to fruition, but we're not banking on hope. We're prepared to understand that our clients could cover debt at those kind of rates if need be. Pipeline for the fourth quarter in our core commercial and small business arenas are as solid as ever. 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 Bank and Bank of Jackson Hole on board to include some pretty interesting dynamics around gathering additional low-cost deposits in the market. I genuinely feel very good about the strengths of our capital position as we face uncertain times with the economy. I feel very good about the markets we're operating in. I feel like in so many respects, the teams are operating at or near a point of running on all cylinders. While my teammates have certainly worked very hard to bring these two acquisitions to close in such a short time frame, no one has taken their eye off the ball in terms of taking care of clients and profitably growing the business.
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. Keep in mind that you know we now 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 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.
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 remain the number one bank in the state of Utah. Talking about punching above your weight. Number one in the state of Utah for production of SBA lending. If you don't detect a little bit of optimism in what you're hearing from me, Jeff, you're not listening.
Fair enough. Love the trust, plug. I'll step back. Thanks.
We'll take our next question from Kelly Motta with KBW. Please go ahead.
Hi. Thank you so much for the question and, congrats on closing both deals relatively recently.
Thank you, Kelly.
Thank you.
I wanted to circle back to loan growth because on an organic basis, it was incredibly strong. Tim, I'm wondering if you could provide any color on the granularity of that, what you added. I know your loan book tends to be on the more granular side, but wondering if there was anything chunky or unusual in that composition because it was just so strong.
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. I do want to emphasize that, you know, this is all relationship-oriented business, and our bankers are rewarded for capturing the full relationship or earning the full relationship with these clients. You know, you can also expect to see, or I certainly expect to see a nice growth in our treasury management services. Obviously capturing those transaction deposit accounts are important to us in terms of keeping cost of deposits down. I will tell you that it remains pretty granular.
We're just making inroads in 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. I'm proud of my bankers because they've been doing it since Labor Day of 2020.
Got it. Thanks for all the color. That's super helpful. Maybe in terms of the size of the balance sheet, I know there's a lot going on with we still have a full quarter impact of the first deal and the second one just closed on October 1st. 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 you know what has clearly been a really strong production engine that you have there.
Sure. You know, certainly first and foremost, we'd 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're not necessarily going to go pay up for deposits, but it is, as Tim mentioned on the combined relationships scorecard for our bankers, and they get paid on bringing both sides of the balance sheet together. Deposit's number one. In terms of investment portfolio, that continues. As you know, we historically have built it with a cash flow in mind. That cash flow is about $18-$20 million a month, that is projected for the next 12 months or so.
That's a nice source if you need to be funding additional loan growth as well. Then, you know, we certainly have still a little bit more excess liquidity left from as you know we didn't deploy that. Those are kind of the three main sources in near term.
Got it.
We still sit at 84% loan deposit ratio. I think historically we've bumped up to 95. I think that's probably where we feel comfortable to go to, you know, when we build out fully leverage the balance sheet. Certainly don't look to reach the 100% loan deposit ratio, but we still have some room to move there too.
Got it. Maybe last question from me has to do with asset sensitivity. I really appreciate the guidance around the margin for 4Q. There is some, you know, the full quarter impact 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 if the deal is 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.
Sure. No, we continue to be asset sensitive, not as much as we were a quarter or two ago. Some of the asset sensitivity has come off as the cash, which a big chunk of the asset sensitivity was sitting in cash, right? To the extent that cash has been invested in a fixed rate loan, that's been taken off the table, locked in at very good yields now. We still both between the two banks, I'd say Rock Canyon was more asset sensitive given the nature of their business at SBA. Bank of Jackson Hole, a little less asset sensitive than us. On net basis, I think they kind of complement us where we were.
On a go-forward basis from here on out, we probably are, you know, let's say half if not a little less asset sensitive as we were, let's say, two quarters ago.
Got it. That's super helpful. Thanks for the time today. I'll step back.
Thank you, Kelly.
We'll take our next question from Andrew Terrell with Stephens Inc. Please go ahead.
Hey, good morning, Tim. Good morning, Aldis.
Hey, good morning, Andrew.
Hey, thanks for the time today. I don't wanna beat a dead horse, but maybe just to start on the margin. Aldis, do you have what the margin was, the NIM in the month of September?
It was slightly above 4%.
Okay. Can you just remind us with the Bank of Jackson Hole, how accretive or dilutive that was to the margin, just pro forma?
Bank of Jackson Hole didn't come on the books until October first.
Yep.
Neither. It was not Rock Canyon Bank added in the net interest income line approximately $3 million to maybe $3.5 million.
Understood. Okay. Maybe I guess I'll just shift gears over to capital. I guess with both acquisitions kinda 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? Can you remind us if there's any buyback in place and whether or not you have any appetite there moving forward?
We will certainly maintain optionality around buying in shares. We happen to believe that we're going to be generating very strong earnings that would support a meaningful move in stock price in 2023. Should the market move against us and we have an opportunity to buy, we'll pursue that. But we also remain focused on some other. I'll describe them as very strategic partnerships or acquisitions, and we are just as focused on our work around 2UniFi. While I haven't mentioned it today, again, I couldn't be more pleased with the progress the team is making on that front. I guess it might be helpful to talk about what we're not as inclined to do. You know, 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 into the trap of 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. Outside of that, we'll be focused on other specialties, specialty businesses that would benefit both the core bank and 2UniFi. I know, Andrew, that's probably a little more than you were looking for, but that's about as much detail as I've provided in a while.
No, that was a great color. I really appreciate it, Tim. 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? Can you remind us where just utilization sits overall, how that compares to kind of pre-pandemic, and then your outlook for commercial line utilization?
Yeah. On page 10 on the loan table, you can see in a footnote that details last five quarters of line draws that we see. You can see it was a bit elevated this quarter, or higher than historically, but I'll say that we booked just as many commitments. The line utilization itself, the way we measure for commercial, all of our commercial lines, is sitting at 62%, and that's been right where we historically been on average.
Okay. I appreciate it. Thanks for the time today. Congrats on a good quarter. I'll step back.
Yep. Thank you.
We'll take our next question from Andrew Liesch with Piper Sandler. Please go ahead.
Morning, guys. How are you?
Hey, well, doing very well, thank you.
Good. Good. I think a quarter ago you mentioned there'd be a couple million dollars per quarter of 2UniFi expenses in the third and fourth quarter. Were those fully realized here in the third quarter?
Third quarter it was about $1 million of 2UniFi-related, $1.1 million 2UniFi-related expenses. Embedded in my guidance is a continuation of that and slight growth. As we enter 2023 I'll be more detailed on that projection in January's earnings call.
Got it. On the fee income guide, does that include both acquisitions, that $15 million-$17 million?
In terms of guidance, it does. In terms of, certainly we've seen 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. Not counting or not necessarily repeating, and that's why you kind of see a bit of a step down there. It does include both banks.
Got it. Makes sense. You've covered all my other questions. Thanks, guys.
All right. Thank you, Andrew.
We'll take our next question from Jeff Rulis with D.A. Davidson. Please go ahead.
Thanks. Just a couple follow-ups. I don't know if you've referenced this, just wanted to confirm the thought of as you close the year-end, it certainly looks like you'd stay below 10 billion. Is that fair to assume?
On a pro forma basis, as we identified in the earnings release, on day one, we were $9.4 billion asset-size bank. It would imply we'd need to build $600 million, which I'd, 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 there.
I'll just remind everyone, around the timing of crossing over the 10 billion threshold in terms of impact on any fee income.
Yeah. Really once we do cross, and again, it doesn't seem likely at the end of this year, it's really the 15 months out. But in today's run rate basis, it'd be impacting us about $8-$9 million dollar interchange income from Durbin, which is certainly like 2% of our total revenues. Very manageable amount.
Yeah. I think the real point is that, you know, you're talking a bit on the 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. We're in a very good place with our regulators on that front in terms of infrastructure and position of the bank. We do benefit from the fact that we're not a heavily consumer-focused institution, and hence the smaller impact on the piece that Aldis mentioned.
Thanks. Just to clarify a couple of the guides. Aldis, the $64 million-$66 million on expense, again, that includes further merger expense, so kind of the core is closer to $60 million, all in?
Core is closer to 60. To build it up, you got it. First of all, yes, it does include the transaction expenses that we still yet to incur here in fourth quarter. If you take those out, the core is closer to 60. To build that up, just for clarity, as we know, NBH, we have been running on standalone basis about $45 million quarterly run rate higher in the quarters when we had higher mortgage commissions, lower now that it's gone, that component's gone down, somewhat offset by the 2UniFi components, so call it $45 million. Which implies about, you know, call it 15-ish or so million dollars between the two banks. They have been running with the pre-purchase or pre-acquisitions.
They've been running $16 million to maybe even $17 million trend. We are already incorporating about 10%-20% cost saves here in fourth quarter. You know, certainly that's maybe not done yet, there yet. Hopefully that helps.
Yeah, no. No, it's more than I bargained for. I appreciate it. 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 to come year to date in that fourth quarter guide margin?
Yeah. It's all inclusive. Let's put it this way, because I mean, again, it's for clarity perspective. For example, for the deposit side and if we were to combine both Rock Canyon Bank and Bank of Jackson Hole core deposits, which came on between 40-50 basis points throughout 2018, certainly that will have an impact in itself too, you know, just in terms of forecasting and projecting for the fourth quarter. Deposit betas will look like they went up, but it's just incorporating their current cost of funds without us moving into deposits. You know, my attempt here was to incorporate all of that in that 4% guidance, including the whatever the actions may be coming.
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 to 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. My full expectation is that we will see the cost of deposits in those markets actually come down from-
Yeah.
On a relative basis, from where they had operated historically.
Yeah. 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.
Well, I'll just simply say thank you. I do wanna thank all of my teammates again for just delivering what I view as brilliant results. More to come, folks. We're excited about our future. Have a good day.
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.