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00:08 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.

00:33 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 US 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. 01:26 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 at www.nationalbankholdings.com. 01:52 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. 02:16 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.

02:40 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 in 2UniFi we believe we can hold core expenses flat at 2021 levels. 03:06 On that note, I'll turn the call over to Aldis for more detail on our fourth quarter financial performance and 2022 expectations.

Aldis?.

03:16 Thank you, Tim. And good morning, everyone. As always, during my comments I will cover cover the financial highlights for both the fourth quarter and the full year, as well as share our guidance for 2022.

03:29 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 of earnings per diluted share.

For the full year 2021, we had reported a record net income of $93.6 million or $3.01 per diluted share. 04:01 And 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%.

And despite the higher levels of excess capital the return on tangible common equity was 12.87%. 04:20 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 quarters 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.

04:55 And 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% to 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. 05:26 Turning to deposits. During the fourth quarter, our total average transaction deposits grew 6.1% annualized as compared to the prior quarter. And core transaction deposits grew 14.2% as compared to the average balances during the fourth quarter of 2020.

Total cost of deposits decreased another 3 basis points to 18 basis points this quarter. Amd we projected cost of deposits to settle at 17 basis point to 18 basis point level for 2022. Again this projection does not include any interest rate increases.

06:03 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 and an $800,000 of accelerated mark accretion from our acquired loan portfolio.

06:23 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 remained 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 20%, respectively.

07:02 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 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. 07:48 During the quarter we also realized $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 to $98 million. Our core banking fees are projected to continue to grow in the low 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. 08:25 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 investment. This was part of our 2UniFi initiative. 08:55 Looking ahead for 2022, we project approximately $4 million to $5 million in expenses related to the 2UniFi ecosystem build out.

this investment the total non-interest expense is projected to be in the range of $189 million to $193 million. As Tim already covered, have sent our investment in 2UniFi and despite the inflationary pressures our core expenses are expected to remain flat to the prior year.

09:26 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, and as a result, the fully diluted share count for 2022 is projected to decrease to around 30.5 million shares. 09:51 Our capital ratios remained strong at 10.39% Tier 1 leverage ratio and 14.26% common equity Tier 1 ratio.

And finally, even with our stock buyback activity, our tangible book value per share increased $0.13 this quarter to $24.33. 10:10 Tim, with that, I will turn it back to you..

10:12 Thank you, Aldis. I also want to 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.

10:29 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 earning stream with an expectation that we will begin delivering incremental results later this year. 10:50 Now turning to 2UniFi.

Our vision is to create a national platform that's 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 borrowings, 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.

11:44 Earlier this week, it was announced that NBH 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.

And 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?.

12:27 Thank you. And we'll first hear from Jeff Rulis of D.A. Davidson..

12:38 Good morning. Hello. Tim, just a question on the Finstro 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 '22 and/or '23 if you framed up anything initially?.

13:20 We've not framed anything up that we're prepared to share publicly at this point. But I am very optimistic about the pace at which we're seeing, in particular, at this point the Finstro partnership evolve.

And I would certainly put it in the category of examples that we're very focused on, when we talk about delivering incremental results and those are incremental to anything that Aldis has shared with everyone this morning. 13:55 We're also looking at some really interesting SBA related market opportunities.

And then frankly, as a result of this work around 2UniFi, we're beginning to recognize use cases related to available technology that we believe can both reduce core expense and deliver incremental revenues. So more to come.

Now we're not ready to put explicit numbers around those expectations, but it is a intense focus and something we're quite optimistic about..

26 Got it. Appreciate it. Just jumping to another topic. All of this -- in the release it you talked about the cash deployment into loans when you look at sort of cash on the balance sheet quarter-over-quarter, do you still got a big balance there i.e.

are we suppose to read into that, that what you did spin-off of the securities portfolio in the quarter was -- in other words, the cash build would have been greater as you not put it in loans is question one. 15:09 And then two.

Could you remind us, I think, you've framed up what -- if you were to return to normal cash levels, what would be the impact to the margin? Thanks..

15:23 Right. So taking the first question first. Really if you look at the margin table, you can see that, actually, on average basis we deploy about $100 million into loans on the cash, so the year-end balance sheet clearly benefits from some late -- late in the year of cash movements and deposit movement. So 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..

15:56 And that would return. I mean, is there -- what's the comfortable cash balance that you --.

16:03 Yeah. We typically run our cash balance in terms of free available cash between $25 million and $50 million at the Fed, you add in kind of the cash letters and wallet money and ATM money, it's about $100 million, $125 million on the balance sheet as we can see on the top of the house. It's what our cash typically would be..

16:27 Okay. And then last one, if I could. The -- just the rotation of what you saw out of nonperforming into OREO, is that -- could that just be one credit or any shift within that total NPAs pretty flat.

But the shift within that, any color?.

16:46 Yeah, that's -- you got it. It's a one credit and it's actually an SBA related loans 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.

And as in many cases and frankly this last quarter being another one of those where things go through OREO almost more often than not to end up with the recovery on those. So this is just one loan going through the process..

17:20 Got it. Okay. Thank you. I'll step back..

17:23 Thank you, Jeff..

17:27 And next we'll hear from Andrew Liesch of Piper Sandler..

17:32 Andrew, good morning..

17:33 Good morning, guys. Good morning. A question on the NII guide, on the 100 basis point rate up scenario. Clearly a nice benefit there. But you guys are also in growth mode and are doing some interesting things in the fintech front.

So my question is that, how much of that boost do you think falls of the bottom line or maybe accelerates other investments in the franchise?.

18:01 Well, I think in terms of how I guided for this year, all of that falls to the bottom line, because the investment in 2UniFi, what we've circled up and as part of the expense guidance already is $4 million to $5 million. So unless there is accelerated investment or change of strategy and additional things, we can see, we can develop.

Right now, all of that would be accretive to us..

18:29 And Andrew it's such an important question, and I think it offers us the opportunity to clarify. We're going to manage with great discipline the pace of our investment in 2UniFi and should we find a need to accelerate investment, we will find opportunities in the company to bring down expense in other areas.

And I just want to be very black and white about that. We'll continue to look at, for example, our brick and mortar distribution network for opportunities to create greater efficiencies. 19:08 So we feel like our estimates around investing in 2UniFi are very tight.

But 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..

19:34 Got it. That's really helpful. And then just -- at this level with the stock here, what's the appetite for more repurchase activity..

19:48 I'm pointing Aldis and he's point at me. I think what we would say is, I'll continue to be opportunistic and 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. And I guess I'll leave it at that, that's a non-answer answer. Sorry, Andrew..

20:40 That's still helpful. All right. I will step back. Thanks for taking the question..

20:45 You bet..

20:49 And next we'll hear from Kelly Motta of KBW..

20:53 Good morning, Kelly..

20:54 Hi Tim and Aldis. Good morning. I wanted to turn to loan growth. 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 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 future outlook would be great..

21:35 Great question. And I think you really hit all of the key categories their at the year-end. I mean, we're excited about what our teams are doing around taking market share.

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.

22:08 I am really pleased with the discipline our teams are showing.

We were back in our offices, if you think about it in July and no later than Labor Day of 2020, we've been engaging, we've done it with sensitivity, we've been careful, but frankly a lot of those prospects that are now clients are in the pipeline to become clients are folks that we have engaged with face to face.

And 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 understand, no one understand their business.

23:00 So, again, I couldn't be more pleased with our team's focus on taking market share. And then finally, we certainly have to acknowledge that strategically we put ourselves in some of the absolute best markets in the United States. I mean, but they continue by virtually any economic metric to outperform US national averages.

And so that represents wind at our back and we're grateful for it, but it was by design. And we'll continue to work very hard to expand in these markets, because they continue to grow and show promise.

23:49 And by the way -- and by the way and both Aldis and I alluded to this, all of that translates into coming into 2022 with a 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..

24:16 Great. And 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?.

24:35 Yeah. So we're constantly in a state of working to develop relationships with groups that we think would be powerful partners. And 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 is investors, it's in their best interest to construct a transaction that's going to be well received in the marketplace.

And 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.

What we -- I can tell you what is 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 take out. If a target doesn't bring incremental capability, an incremental opportunity to the table it's not something we will focus on.

Kelly has stopped. I'm not sure if you have any other questions. But that's where I would leave it..

26:23 And she may have dropped. We'll move on to Brett Rabatin of Hovde Group..

26:32 Hello..

26:35 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. And you guys like many of deposits increase about a third post the pandemic or through the pandemic.

And I'm just curious as you look out on the horizon, what's your assumption is for the deposit base? 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?.

27:11 Great question. I'll begin and then turn it to Aldis for more detail. But we've talked about this on prior calls. And what I would tell you is, I do think that -- could be lowered to 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. So it's one thing to see this, what could be obviously a temporary increase or flex-in and 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. 28:05 Now having said that, to come back to your -- the details around your question, I'll throw it to Aldis..

28:12 And that's why we didn't necessarily provide explicit guidance on deposit growth itself as we are building that relationship and client base behind it. But throughout -- 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.

But again, some of the -- how the liquidity withdrawals by the Fed and maybe quantitative tightening will play out. It's hard to put a very hard estimate on it..

28:54 Okay. Fair enough.

And 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?.

29:06 Yeah, that's part of our loan growth, this quarter was also the line utilization that pick up. And I'd say our lines return to kind of long-term averages. At the moment at the end of the fourth quarter and it is in our loan tables. You can see how the quarter to quarter line utilization benefits or take off the loan growth.

But this last quarter was a good line utilization, it seem like were starting to drawdown..

29:40 Okay. Great. Appreciate the color..

29:41 You bet. Thank you..

29:47 Next we'll hear from Andrew Terrell of Stephens..

29:51 Hey, guys. This is on for Andrew. Congrats on the great quarter..

29:57 Thank you, John..

29:58 Aldis, I guess quick question on the deposit base again.

I guess, how should we be thinking about deposit beta as NBHC in a rising rate environment? And is there any reason to think that your beta in this cycle will be dissimilar to last cycle? And can you remind us, like what you assume in your disclosed NII sensitivity for deposit beta?.

30:22 Yeah, so first of all, I'll start that. Look, if you look at our deposit construction for us, 40% of our deposits are in non-interest bearing deposits. So that bodes well for any rising rate environment to begin with.

In that 5.4% 100 basis point rate shock scenario that I talked in my prepared remarks, embedded there is about 30% deposit beta on total deposits. But again, once you kind of -- if you back into what does that mean for interest bearing deposits, that's actually 50% deposit beta.

And then to kind of get to your -- just your question, I think it is quite conservative because if you go back in the last tightening cycle, our deposit beta was between 10% to 25% depending on the period when you measured it. 31:18 So we are quite conservative in the way we modeled and project this.

For the benefit of folks that have joined us on the call today, translate that 5.4% at 100 basis point rate shock, roughly $2. That approximately would be $12 million annualized pickup after 100 basis point increase in Fed fund rate..

31:48 Got you. That's helpful. I appreciate the color.

And one last one, can you remind us of the repricing dynamics of the loan portfolio? How much is floating rate adjustable fixed? And do you guys have loan force in place on any of those floating rate?.

32:06 Yeah. So it is our loan book is approximately 40% -- call it 40% to 42% variable rate that is variable index either prime, LIBOR so far these days. Of that just only 15% of that only is with rate floors that would not lift, call it, for the first 50 basis points to 75 basis points.

The vast majority of our LIBOR loans will have an immediate benefit as the rates move up..

32:43 Awesome. I appreciate the color. That's all I had. I'll step back..

32:46 All right. Thank you, John.

April?.

32:55 Thank you. And 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..

33:04 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..

33:23 And 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 4 hours and will run through January 26, 2022 by dialing 888-203-1112 and referencing pass code 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..