National Bank Holdings Corp Q1 FY2025 Earnings Call

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2025 First Quarter Earnings Call. My name is Danielle, and I'll be your operator today. As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to Emily Gooden, Chief Accounting Officer and Director of Investor Relations.

Thank you, Danielle, and good morning. We will begin today's call with prepared remarks followed by a question-and-answer session. 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, noninterest income, margins, allowance, taxes and noninterest 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, 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 and CEO, Mr. Tim Laney.

Thank you, Emily. Good morning, and thank you for joining us as we discuss National Bank Holdings' First Quarter Results. I'm joined by our President, Aldis Birkans; as well as our Chief Financial Officer, Nicole Van Denabeele. We delivered earnings of $0.63 per diluted share during the first quarter, which was negatively impacted by a loan that involves suspected fraudulent activity by a borrower. The matter was discussed and fully addressed, I want to emphasize fully addressed during the quarter. The charge-off is related to a Colorado-based Del Taco franchise and the matter is now in the hands of all appropriate authorities. We delivered a 1.1% return on tangible assets despite this charge-off. Clients remain cautious during the quarter as did our company. Our business clients are generally reluctant to engage in capital projects or M&A until there's more certainty around the economic environment. Likewise, our current posture can best be described as being in a risk-off mode. We've seen clients holding on to higher levels of cash, which is benefiting our deposit balances. Finally, in light of the current environment, we're intensely focused on credit quality as well as expense control, two areas where, as you know, we have a solid track record. Nicole, I'll now turn the call over to you for greater detail on the quarter.

Thank you, Tim, and good morning. During today's call, I will cover the financial results for the first quarter as well as touch on our guidance for the rest of 2025, which does not include any future interest rate policy changes by the Fed. For the first quarter, we reported net income of $24.2 million or $0.63 of earnings per diluted share. As Tim shared, the first quarter's results were impacted by elevated provision expense resulting from a $9 million charge-off on one credit as a result of suspected fraud by the borrower. Even in light of this, the first quarter's return on average tangible assets was a solid 1.1%. We grew our fully taxable equivalent pre-provision net revenue by 3.4% over the first quarter of last year. Like much of the industry, we experienced a slower-than-expected start to the year, and as a result, our loan balances decreased by $105 million. The elevated levels of economic uncertainty have resulted in our clients delaying their funding needs while they wait for more clarity. We are now operating with a risk-off posture. And having said this, our bankers remain committed to growing client relationships, and we continue to build our pipeline. While we aim to achieve our full-year loan growth guidance of mid-single digits, we acknowledge that geopolitical and economic factors have the potential to affect our growth trajectory. Fully taxable equivalent net interest margin totaled 3.93%. Fully taxable equivalent net interest income totaled $88.6 million. The linked quarter decrease was primarily driven by two fewer business days and $38 million of lower earning asset balances during the first quarter. Compared to the first quarter last year, FTE net interest income grew by 3.4% as a result of our disciplined loan and deposit pricing over the last year as the Fed lowered rates. First quarter's new loan originations came in at a weighted average yield of 7.3%. As we continue to originate loans, these new loan yields will be accretive to our net interest margin. As I mentioned earlier, we do not incorporate future interest rate changes in our projections. With that in mind, for the remainder of 2025, we project fully taxable equivalent net interest margin to be in the mid-3.9. Turning to deposits. Spot deposit balances grew by $186 million during the quarter and benefited from seasonal tax inflows, including the Cambr platform deposits. Cost of deposits improved by 9 basis points during the first quarter to 2.03%. Turning to credit quality. Our nonperforming loan ratio remains below peer averages and ended the quarter at 45 basis points of total loans, down from both year-end and the same quarter last year. Past due loans decreased by 25 basis points during the first quarter to 24 basis points of total loans and now sit at its lowest level over the last 12 months. First quarter net charge-offs were elevated at 20 basis points for the quarter, primarily driven by suspected fraudulent activity by one borrower that materialized during the quarter. We moved quickly to fully charge off this credit during the quarter. And as Tim shared, the fraud is now being investigated by the appropriate authorities. The quarter's provision expense of $10.2 million was booked primarily to cover this charge-off. The allowance to total loans ratio ended the quarter at 1.2%. Additionally, we continue to hold $22 million of marks against our acquired loan portfolio, which adds an additional 28 basis points of loan loss coverage if applied across the entire loan portfolio. In regard to our CECL modeling approach, our modeling weight to downside scenario in addition to the Moody's baseline scenario. The forecast underlying the economic scenarios remained largely unchanged during the first quarter of 2025. Total noninterest income for the first quarter was $15.4 million. Mortgage banking income increased by $1 million over the linked quarter. Service charges and bank card fees were seasonally lower during the first quarter. SBA gain on sale and swap fee income are highly correlated to loan production, and as a result, were slower during the first quarter. For 2025, we continue to project our total noninterest income to be in the range of $72 million to $77 million. We remain committed to disciplined expense management in all environments. Noninterest expense for the first quarter was well managed and totaled $62 million. This included the benefit of $2 million of payroll tax credits realized during the first quarter. Our 2UniFi development remains on track, and we are preparing to provide revenue guidance with 2025 year-end results. 2UniFi expenses totaled $3.4 million for the first quarter and are expected to meet our full-year guidance for 2025. We have previously demonstrated our ability to manage expenses in tough environments. As such, looking ahead to the remainder of 2025, we are confident that we will deliver total expenses at the low end of our previously guided range of $272 million to $278 million. We maintained strong levels of liquidity and continue to grow our excess capital. We ended the quarter with a strong tangible common equity ratio of 10.1%, Tier 1 leverage ratio of 10.9%, and a common equity Tier 1 ratio of 13.6%. Tangible book value per share grew by 2.6% in the first quarter to $25.94. With that, I will turn the call over to Aldis.

All right. Well, thank you, Nicole, and good morning. I will briefly cover the balance sheet trends and give an update on the business environment. As Nicole has shared, we had a slower start to the year than expected. The first quarter's loan fundings totaled $256 million with an average funded rate of 7.3%. Increased levels of volatility due to concerns about inflation, higher interest rates, supply chain stress, and tariffs caused a large number of businesses to pause their activity. Small businesses in our markets have become more cautious in their plans for capital expenditures and M&A. Having said that, we still have an upside in our geographies to take market share and improve our pipeline pull-through, and we aim to achieve our full-year loan growth guidance. On the credit front, of course, we are disappointed by the large charge-off that impacted this quarter's results. Tim has covered that in as much detail as we can at this time. However, looking at the rest of the loan portfolio, we see improving trends with nonperforming assets down 7 basis points from a year ago and 1 basis point on a linked quarter basis. 90 days past due loans are down to just 1 basis point from 19 last quarter. On the deposit side of the balance sheet, our relationship-based banking model continues to pay dividends. Our deposit balances grew by $186 million during the quarter and, in the process, we lowered our cost of deposits by another 9 basis points. Some of the linked quarter growth was driven by tax seasonality that occurred later in the quarter. And like the loan pipelines, we continue to see productive banker engagement, which is resulting in client deposit balance growth. Lastly, let me touch on the expenses. As our long-term shareholders know, historically, we've had a strong track record of improving our operating leverage through both revenue growth and intense focus on our expense management. We have accomplished that by finding efficiencies through investments in technology and improving process flows. Given the current uncertain macroeconomic environment, we have already paved the path to delivering our total expenses at the low end of our full-year guidance. Tim, with that, I'll turn it back to you.

Thanks, Aldis. We believe we've built a fortress balance sheet, and we're well positioned to navigate volatile markets. We also benefit from operating in attractive geographic markets, and I commit to you that our teams remain focused on building deep relationships with our clients, while also taking very targeted market share. And on that note, Danielle, I'll ask you to open up the line for questions.

And we'll take our first question from the line of Jeff Rulis with D.A. Davidson.

Question on the fraud item. I know that, Tim, you said you shared what you could. I guess, as that goes into the investigation stage, is there any comment on expectation for recoveries at this point?

Yes. Look, it's a question I would love to answer. But at this point, as we've said, we've turned it over to appropriate authorities and are not in a position to comment on the matter any further.

But I mean, what you could say is it's a nonsystemic kind of a one-off, not related to others.

Certainly, it's not centered around any systemic issues and pertains to just one client. Thank you. I'm happy to clarify that point.

Got you. As it relates to the margin, was the reported 3.93% affected at all? I’m not sure if that’s just removed from earning assets or if there was interest loss that had an impact. Your guidance of the mid 3.90% suggests a slightly higher figure. I’m just checking to see if that impacted the margin at all in the quarter.

It did slightly. At most, it was 2 basis points because it surprised us in the first quarter, and there was some interest accrual that had to be reversed along the way. That's about a 2 basis point margin impact. Additionally, regarding margin, we made investment security purchases. At the minimum, we reinvested these to be sold late last year in order to keep our balance sheet below $10 billion. Since we didn't grow loans as much as we expected, that also impacted the asset yield mix in our margin calculation.

Jeff, just coming back to your earlier question, I do want to make it clear that as it relates to the specific borrowing situation, the specific loan that we fully addressed it in the quarter. To be very clear, there is no additional downside exposure to this client or former client.

Got it. And maybe a last one just on the charge-offs. I think you said of the net charge-offs, $9 million was associated with this loan. But absent that, I mean, you had another lump of charge-offs in there. Where did the rest of the charge-offs come from a sector standpoint?

Yes, there is nothing specific, as Tim mentioned, back to his remarks. There's nothing, call it, systemic or industry specific. It was several other small charge-offs and most of them are actually reserved for as through our CECL allowance modeling. So therefore, the provision expense didn't reflect that component.

Okay. Got it. I guess based on your other comments about broad-based credit being pretty solid, your expectations ahead for charge-off activity would expect to revert towards more historical levels. Is that fair to say?

Absolutely. Yes. Yes. And again, if you look at the credit trends, NPAs down, NPLs down, delinquency is down. We find ourselves in an improving credit environment from already, I would say, better than, call it, industry averages on NPAs at least.

We'll take our next question from the line of Kelly Motta with KBW.

This is Charlie on for Kelly. Maybe from a macro perspective, how are you guys thinking about your tariff exposure? Have you run any analysis there trying to size up direct exposure? And just how you're thinking about the portfolio from that perspective?

Thank you, Charlie. We have observed that clients are evaluating the potential impact on their businesses. It's too early for us to make a definitive macro assessment, especially with the fluctuations in potential tariffs complicating things. The uncertainty has caused our clients to carefully hold back on capital investments and mergers and acquisitions. However, the positive aspect is that there is still demand, which we believe will lead to an increased need for borrowing. I apologize for not providing a clearer response regarding the macro tariff impact at this time. If anyone has insights on that, I would be interested to hear.

And yes, it seems like pipelines are still holding in. And I know you reiterated the mid-single-digit loan growth for the year. But what could cause you to maybe miss or beat that from here? Just like some detail or color there would be great.

We appreciate that the markets we operate in consistently outperform national averages, which gives us confidence in our successes. However, the uncertainty Tim mentioned is something we are monitoring closely, as our clients and prospects are as well. As highlighted on Page 9 of the earnings release, the slowdown was not isolated to a specific group or region; it affected our entire portfolio. If you examine that table, you'll see that almost every asset class experienced a decline.

That's great. And then maybe one more for me. What are your thoughts on capital? You are at healthy levels and historically, you have repurchased shares consistently. With the prices being volatile at these levels, how are you viewing the buyback going forward?

We are giving, as you might imagine, buyback more attention than we have in some time. And I'll leave it at that.

We'll take our next question from the line of Andrew Terrell with Stephens.

I wanted to start by discussing growth. Setting aside the fraud issue this quarter, the credit situation appears quite positive, and you noted some reductions in non-performing assets. The outlook on credit also seems encouraging. I generally perceive your approach as relatively cautious, but I noticed Nicole's comment in her prepared remarks about adopting a more cautious stance currently. I'm trying to reconcile those two views and specifically, I would like to understand what it means to operate in a cautious posture.

Yes, I'll take that. We do believe we operate with a generally conservative posture on credit. And we tend to adjust that posture based on different emerging risks or potential emerging risks in the marketplace. And certainly, as all this suggested, when we think about potential volatility around interest rates, Charlie was just asking about the impact of tariffs, ultimate macro impact, downside impact on the economy, we do tend to add additional levels of rigor, not only around underwriting of new clients, but we with no apologies ratchet up our scrutiny around taking market share in an environment like this. We think it's incredibly important to be almost excessively thoughtful in the way we bring new clients into the bank in this environment. And it's our responsibility to be closer than ever to our existing clients as we help them deal with these uncertainties. So those would be examples of where we think we're being accountable and appropriately adding more risk controls in our credit underwriting process.

That's very helpful. I appreciate it. If I could just ask on the expenses. I mean, obviously, you guys are tracking very well relative to the guidance. Do you have a dollar amount just of the payroll tax credit this quarter? Just trying to get a sense of what would be kind of clean operating expense?

Yes. Andrew, the dollar amount for the payroll tax credits that we realized in the first quarter was $2 million.

Got it. Okay. Perfect. And then back on just some of the capital discussion. It sounds like maybe some interest in buyback from here. But Tim, I was hoping you could talk about M&A in this environment. I'd imagine it's maybe a bit challenging to get a deal together. But can you just compare and contrast interest in M&A relative to the buyback?

Well, as we sit here this morning, the best acquisition I could make would be buying back our own shares. This indicates where our priorities lie. In terms of market acquisitions, it's been a challenging environment. Many institutions and their leaders are understandably taking a wait-and-see approach, and I get that. Additionally, we cannot announce the fraud issue we experienced in the first quarter without acknowledging its impact on our stock, which affects our ability to pursue acquisitions. We need to demonstrate to the market that this was simply an anomaly. My focus remains on achieving our targeted income growth for the year. If that means exceeding the lower end of our expense guidance, we will do it. Our commitment is to reach our bottom line profitability goals. Despite this, we are building capital, and it’s important to note that we're doing this while also investing in 2UniFi. I am pleased to say that we expect to launch 2UniFi at the end of this quarter, and we are excited about its future. Furthermore, we are operating within the guidelines we set at the beginning of the year.

We'll take our next question from the line of Andrew Liesch with Piper Sandler.

I have a few follow-up questions regarding expenses in the fee income guide. When factoring in the payroll tax benefit, you're significantly below the lower end of that range. Can you clarify where we should expect expenses to increase over the remainder of this year? Will it be more related to investments in 2UniFi or compensation costs? What areas should we anticipate expenses to rise in moving forward?

Andrew, that's a good question. After adjusting for the $2 million payroll tax benefit this quarter, our expenses are quite consistent with the same period last year. This indicates that we are effectively managing our expenses and maintaining discipline in our spending. Throughout the year, you will see an increase in our investment in 2UniFi, which comprises several components. Firstly, as Tim mentioned, once we launch 2UniFi, we will notice a rise in our expense run rate due to the amortization of the capitalized investment made. Additionally, we are continuously investing in developers to support this development, and as we go live, we will also allocate funds for marketing related to 2UniFi. This is part of the ramp-up we anticipate for the rest of the year. However, you're correct that we are currently operating at or below the low end of our guidance.

Got it. Okay. So right now maybe for the second quarter, a little bit higher than the first and then a step up in the third quarter once 2UniFi goes live. Is that the right way to think about it?

Yes, it is.

Got it. And then on the noninterest income side, similar commentary, there was a similar question there in the first quarter tracking below the end of the range. Where should we see fee income ramp up? Is it from the swap fees or SBA loan sale gains, I mean, if that's driven by loan production, can that get to your target?

Yes, you got it. So that's probably the most obvious one. If you look at the other noninterest income line item that's unusually low for us this quarter. And I'd say, rounded about a couple of million dollars there between at least those two line items that just, again, given the slower loan production did not materialize as much on SBA and swaps. But we do expect to improve that line item. And then obviously, in the quarter, service charges were lower in the first quarter as we have it too.

We'll take our next question from the line of Brett Rabatin with Hovde Group.

Wanted to start off, Tim, the last time we talked, you were indicating that the market has gotten a lot more competitive from a pricing perspective. And I think you mentioned a 7.3% origination rate during the quarter. Just wanted to see how that's trended in terms of what you're seeing competitively and then how that might factor into growth this year if pricing is too competitive, do you just sit, or do you get more competitive with the competition to drive some loan growth?

And I believe what I've covered was we were seeing some pressures on both pricing and credit structure. And back to some comments around our risk-off position in the first quarter, we are not going to follow those trends down market. I simply would rather sit on the sidelines, which I don't think we have to do altogether with targeted marketing. But we have seen some competitors constructing transactions that we simply would not be interested in. As it relates more specifically to your question on pricing, Brett, we feel very good about the depth of the relationships we have with existing clients. They value the relationships, the all-in relationships. And we think we're able to protect, maintain solid pricing as I think certainly, all of the analysts on the call know for years, we've operated with a relationship profitability model that values every element of what a client does with our bank. Think of it as an income statement for every client. We're looking at the return on capital from that client, and we're looking at the bottom line net contribution of that client. It does give our bankers some flexibility to deal with, to address loan pricing with the clients, for example, keeping enough other balances or enough other services because ultimately, we're interested in the all-in return. So I'll throw this to Aldis for maybe a more direct view. But from my perspective, pricing isn't proving to be the real challenge. I would just say we have to be very cautious with where we see some of the market going on credit structure.

Yes. And I think Tim covered it really well. I mean back to proof of that is 7.3% in the first quarter in long originations. We feel very good about that. It's very accretive to our margin and rest of the loan book that is really a 6.4%. So pricing really is back on the relationship bases is something that we can and know how to adjust for credit. On the other hand, we will not yield on.

Okay. That's great color. And then on the deposit side, I noticed average balances were kind of flattish, but the end of period savings and money market was up quarter-over-quarter quite a bit. And just wanted to see if you think those deposits - I know you mentioned your customers were being more conservative - if that was excess liquidity? Or do you think that's core growth? Just any thoughts on those balances and deposits from here?

Yes. So there's a couple of things to go through that. One is what Tim mentioned is a little bit of excess liquidity of the clients that did not necessarily deploy it in their business growth. We also saw a little bit of a tax seasonality. That's primarily in the Cambr flows that helped the spot balances later in the quarter. So those are somewhat sticking around for the period of time as those monies are spent. So again, we've ended the quarter at 90-ish loan deposit ratio. We like that, see a lot of upside in engagement back to the relationship approach we take with every client, the view and demand operating accounts from all of our relationships. So therefore, we feel like we can grow the deposit balances along the lines with the loan growth.

Okay. And then maybe just last one for me. The securities purchases during the quarter. Just curious what you bought and if you might get the liquidity to buy more? Any thoughts on that portfolio and yields from here?

Yes. We redeployed all of the cash from our investment security sale in the fourth quarter. In January, we bought $240 million in high-quality, short-duration investment securities that align with our historical holdings. We acquired these at approximately a 5% yield, which boosted our net interest income, since the securities we sold had a yield of about 2.65%. Aldis, do you have anything to add?

No, I think the guidance on that was that we will maintain cash on the investment portfolio book is about 15% of the total assets and we aim to deliver that this year. And as a reminder, the investment portfolio is a liquidity portfolio. So back to Nicole's comments, it's highly liquid, short duration, conservative investments, and we don't view that as a store of capital, for example. So we measure it the just enough amount of money that we need for liquidity purposes to be stored on balance sheet, and that's how we came up with that 15-ish percent guidance.

We'll take our next question from the line of Jeff Rulis with D.A. Davidson.

Sorry, I tried to get out of the queue and couldn't manage it. To clarify Nicole's comments on expenses, to reach the lower end of the guidance, you would need to average close to $70 million in noninterest expenses for the remainder of the year. This estimate considers backing out the payroll benefit and an increase related to 2UniFi. I have just one question regarding 2UniFi. Yes, please go ahead.

I have to complement you, your math is always very good.

I appreciate it, Tim.

We're all sitting here smiling and nodding our heads.

All right. Well, that's rare. Let's see, just on the 2UniFi front. I think you mentioned the revenue contribution reveal, I guess, was that end of the year? Or would that be within January with the Q4 results?

Yes. Consistent. Yes, to clarify, it will be released with fourth quarter results and guidance for next year. And our expectation, in fact, is to begin to build toward a multi-year outlook for 2UniFi. All right. Well, look, thank you very much for your thoughtful questions this morning. We're focused on protecting our company. We're disappointed with this fraud hit that we took in the quarter. We do not in any way believe it's a systemic issue. Again, we've turned it over to appropriate authorities and believe it will be addressed appropriately. What we're focused on is taking care of our clients, taking care of our teammates and growing this company. So again, thank you for your questions this morning. Have a good day.

And this concludes today's call. If you would like to listen to the telephone replay of this call, it will be available in approximately 24 hours, and the link will be on the company's website on the Investor Relations page. Thank you very much, and have a great day. You may now disconnect.