National Bank Holdings Corp Q2 FY2025 Earnings Call

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2025 Second Quarter Earnings Call. My name is Rachel, and I will be your conference operator for today. As a reminder, this conference is being recorded for replay purposes. We will begin today's call with prepared remarks followed by question and answer. 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 provide useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on 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.

Thanks, Rachel. Good morning, and thank you for joining us as we discuss National Bank Holdings' second quarter results. I'm joined by our President, Aldis Birkans, as well as our Chief Financial Officer, Nicole Van Denabeele. We delivered earnings of $0.88 during the second quarter with a 14.2% return on tangible equity and a 1.5% return on assets. We delivered a strong net interest margin of 3.95% resulting from deposit and loan pricing discipline. During the quarter, our teams produced $323 million of loan fundings, while also remaining focused on reducing exposure within certain higher-risk industries, which Nicole and Aldis will speak to later. We believe these actions will result in more responsible profits in the future. During the quarter, we also took action to reduce our core bank annualized personnel expense run rate by a full 10%. Finally, we are pleased to share that we successfully launched Release 1 of 2 Unifi in the Apple app store and expect to go live on Android July 30. Activity has been solid, particularly in light of the fact that we have not even launched our marketing campaigns. Further, user feedback has been quite positive. And on that note, I'll turn the call over to Nicole. Nicole?

Thank you, Tim, and good morning. During today's call, I will cover the financial results for the second quarter as well as touch on our guidance for the rest of the year which does not include any future interest rate policy changes by the Fed. For the second quarter, we reported net income of $34 million or $0.88 of earnings per diluted share. This resulted in a strong return on average tangible assets of 1.5% and return on average tangible common equity of 14.2%. We grew our fully taxable equivalent pre-provision net revenue by 19.9% over the second quarter last year, maintained a strong net interest margin and built additional excess capital. As Tim shared, our teams generated $323 million of loan fundings during the second quarter. Elevated loan paydowns, coupled with strategic portfolio reductions within targeted industries led to a decline in loan balances during the quarter. Our bankers remain committed to growing client relationships. We continue to build our pipelines and are projecting annualized mid-single-digit loan growth for the second half of the year. Fully taxable equivalent net interest margin expanded 2 basis points during the quarter to 3.95%. Fully taxable equivalent net interest income increased $0.7 million during the quarter to $89.3 million and grew by 4.7% compared to the second quarter of last year. The year-over-year increase in net interest income is a direct result of our disciplined loan and deposit pricing over the last 12 months, which has resulted in solid margin expansion. Second quarter's new loan originations came on at a weighted average yield of 7.4%. For the remainder of 2025, we project fully taxable equivalent net interest margin to remain in the mid 3.9%. And as I mentioned earlier, this does not incorporate any future interest rate decision by the Fed. Turning to deposits. Seasonal tax outflows resulted in a decline in average deposit balances of $58.8 million during the quarter. Cost of deposits totaled 2.05% and our total cost of funds was 2.09%. Turning to credit quality. Nonperforming loans decreased during the quarter to $33.3 million. Our nonperforming loan ratio remains below peer averages of 45 basis points of total loans. Annualized net charge-offs for the quarter were just 5 basis points. The allowance to total loans ratio remained consistent at 1.2%. Additionally, we continue to hold $20 million of marks against our acquired loan portfolio which adds an additional 26 basis points of loan loss coverage if applied across the entire loan portfolio. Noninterest income for the second quarter totaled $17.1 million, 11% higher than the first quarter and 22% higher than the second quarter of last year. For the second half of 2025, we project our total noninterest income to be in the range of $34 million to $36 million. Noninterest expense totaled $62.9 million, a $0.9 million increase over the first quarter as a result of $1.9 million of payroll tax credit, which lowered the first quarter's expenses. Excluding the payroll tax credits benefiting the first quarter, noninterest expense decreased $1 million on a linked quarter basis as a direct result of intentional efforts to lower our operating expenses. In light of the ongoing economic uncertainty, we took action during the second quarter and executed on an expense reduction plan. We incurred nominal restructuring expenses during the quarter, and estimate the actions taken at the end of the second quarter will reduce our annual core bank personnel expense by approximately $15 million. As a result, we are lowering our projection for noninterest expense. We now project our noninterest expense for the second half of the year to be in the range of $126 million to $128 million. As you have heard, we are pleased to have launched 2 Unifi last week. As a reminder, we are preparing to provide 2 Unifi revenue guidance with 2025 year-end results. For the second quarter to Unifi expenses totaled $4.6 million. We project to unify expense for the second half of the year to be in the range of $16 million to $17 million increasing primarily as a result of amortization expense on the capitalized development asset now that to Unifi is live. With the expense reduction actions taken in the second quarter, we project to continue to grow quarterly pre-provision net revenue, even with the increase in the 2 Unifi expense expected in the second half of 2025. We maintained strong levels of liquidity and continue to build excess capital. We ended the quarter with a strong TCE ratio of 10.5% and Tier 1 leverage ratio of 11.2% and a common equity Tier 1 ratio of 14.2%. Year-to-date, our tangible book value grew by 10.7% annualized to $26.64. With that, I will turn the call over to Aldis.

All right. Well, thank you, Nicole, and good morning. As Tim and Nicole already mentioned, loan production activities started picking up in the second quarter with healthy loan fundings of $323 million, which was an increase of 26% over the first quarter's slower start. And while we still see some clients being somewhat cautious in this economic environment, our loan pipelines for the second half of the year are building nicely. We entered the third quarter with a good level of energy and optimism. As always, we have not and will not compromise on credit. Our bankers focus on full relationship banking and do not chase deals just to show growth. I think the best evidence of this is our loan pricing discipline with new loan rates coming on at a strong 7.4%. Our loan and deposit pricing discipline during the quarter allowed us to expand our net interest margin by 2 basis points to 3.95%. In terms of the overall loan portfolio, the decrease this quarter was primarily driven by declines in certain higher-risk asset classes. For a while, we have expressed concerns with the trucking industry in a while since we have originated loans in this space. And this quarter, we saw an opportunity to decrease our trucking portfolio exposure, which now sits at just about $100 million or just 1.5% of the total portfolio. Additionally, we decreased our exposures within the agricultural and within the commercial real estate sectors. In aggregate, these 3 asset classes ended up driving the portfolio decline this quarter. We continue to see solid credit metrics. There's just 5 basis points in annualized net charge-offs and NPAs continuing the recent downward trend with another $1.6 million decrease this quarter. The NPA ratio ended the quarter 1 basis point better than the first quarter at 0.45%. This quarter, we also saw a nice growth in our fee income on both linked quarter basis and as compared to the prior year second quarter. And while this quarter was helped by a $1.3 million gain on the disposition of consolidated banking center buildings, we did see a seasonal rebound in our bank card income as well as an increase in SBA gain on sale income. As loan volumes continue to pick up for the second half of the year, we project higher fee income related to SBA gain on sale as well as derivative fees. Then with that, I'll turn it back to you Tim.

Thank you, Aldis. Well, we had an active second quarter. We generated $323 million in new loan production. We successfully reduced loan exposure in targeted industries with higher risk profiles. We maintained pricing discipline resulting in a 3.95% net interest margin. We took action to reduce our core bank's annualized personnel expense run rate by 10%. We successfully launched Release 1 of 2 Unifi, and we grew our tangible book value to $26.64 per share. On that note, Rachel, let's open up the call for questions.

We will take our first question from Jeff Rulis with D.A. Davidson.

On the loan side, it seems quite cautious, and I wanted to check on the amount of higher-risk trucking, agriculture, and commercial real estate. Given the guidance of moving towards a mid-single-digit pace, it appears that most of what you intended to address is mostly completed. My first question is about that. Secondly, I wanted to know if there’s any management of growth related to the $10 billion asset threshold, and whether that is still influencing the growth levels somewhat.

I'll answer both together, if that's all right. Yes. Because to begin with the latter question, I would tell you that there's been no management at this point to stay under the $10 billion threshold. Again, we've been operating for years and we were regulated as though we were a $10-plus billion bank. So that expense has been embedded in our run rate for years. No issue there. We've outlined what Durbin would be, which is, in the grand scheme of things, nominal. This growth matter is going to be reconciled in the second half of this year because to answer your question, we've largely taken action against the bulk of the relationships and loans that we felt we need to. Now, are there others we're watching closely and would the right opportunity to take them down absolutely. But I'll also remind you that we operate well under all regulatory limits with our own house limits. And none of these areas we've talked about had even approached our house limits. This was just really an active caution and being proactive. And as I said in my prepared remarks, I really believe it's the kind of action you have to take that translates into more productive results down the road.

The optimism regarding our growth pipeline for the second half is strong, likely the most robust we have experienced in the last year as we enter the third quarter. We have activity and a plan in place to achieve mid-single-digit growth for the second half. If there are additional opportunities, we will certainly pursue them.

Yes, that was great. I appreciate the detail. If I move on to the margin, we have a steady outlook from here. From our previous discussions, it seemed like there are some solid opportunities. Based on those new loan yields, there's potential for good reinvestment not only in loans but also in securities, which is positive. If I could ask about the environment you foresee for potential margin expansion, what would need to happen for it to move closer to 4% rather than remaining steady?

Well, first of all, I mean, we are very proud of 3.95% margin. I think that puts us in a very good company in terms of peer banks. But in terms of the outlook, I think what would really have to move our margin in a positive way is really DDA growth. At the end of the day, that's math on that, bringing in costing deposits and lending it out at 7.4%. It's obviously extremely margin accretive. So I think the deposit mix will drive the outlook for the margin.

We will take our next question from Kelly Motta with KBW.

This is Charlie on for Kelly. It is exciting to see the Unifi launch this month on the platform and the partnership with NAV. Can you speak about how the launch went and how the market is receiving to Unifi and provide some color on the partnership and how it came about and what benefits you think it can bring to the platform?

Yes, I would compare our launch to the soft opening of a restaurant. We had done prior friends and family testing in a lockdown environment. So now to be in a position where anyone can access the app and begin the process. What you'll find is you get to the point to sign up unless you're a small business or medium-sized business and have an EID, it's going to be challenging to go too far. But what I would tell you is that all of our security and fraud detection systems have worked beautifully. We've certainly seen, as happens with any financial app, multiple attempts to penetrate there. And we're really proud of the safeguards that have been built here to protect both the bank and our future clients to Unifi. The feedback has been very positive in terms of how familiar the user interface is. It's intuitive. We take no shame in saying that we were inspired by companies like Apple, who we think, over the years, have developed a very intuitive way of doing business in the digital world. And look, we'll be getting our advertising started here in the near future, you'll see more on our landing pages that begin to tell the story. And candidly, there's a big element there that's going to be coming soon because as we had told the market we're starting with a fundamental simple product that's absolutely incredible for a small business owner, which is a depository suite product that allows these owners to access attractive interest rates on their deposits while maintaining their operating accounts with Unifi. But that's just the beginning. The beginning, as we've said before, is building this full ecosystem where you're essentially, as a small business owner, able to do one-stop shopping anywhere in the United States for your business needs. We'll be working with both private credit and other banks to offer alternatives on credit. First out of the chute there, you're going to see an SBA offering that will be introduced. We're also working with a merchant payments company on a creative approach to helping small businesses realize the lowest possible rates on their merchant transactions here in the United States, and we think that can be a huge driver. Ultimately, I will tell you that I think, given the data lakes we've built, we've invested millions of dollars in information management that to Unifi is going to be more of an information company than a bank. We've built it not to be reliant on, with all due respect, the big core suppliers like FIS and Fiserv, we're more nimble. We have more control of our clients' information that allows us to give more information back to our clients. And it also certainly helps us as we look at how we'll be able to manage risk by having all of that information contained. And then finally, I would tell you that we ultimately see this as being a membership fee-based business. If a business owner wants to transact and work within the Unifi ecosystem, they're going to pay a monthly membership fee, no different than what you would see or what you would pay today with an Amazon Prime membership. So that's, maybe Charlie, even more color than you were looking for, but I hope that helps.

That's great. And just to clarify, this is mainly coming through fee income? Or do you expect this to be like a balance sheet play are you aiming to get loans and deposits?

It's a great question. We're not focused on this as a big balance sheet play. We really aren't. I mean, again, think about on the credit front, we may be a partner in originating loans, but the reality is, what we want to do is make it easy for a plethora of United States banks, mostly community banks, to access lending opportunities to small and medium-sized businesses. For that, we would collect a fee or a share. The deposits, we're able to think about how we leverage Camber to take those deposits and then swipe them as broker deposits to other financial institutions. Again, not a heavy balance sheet play, high ROE, big on information and membership fees.

That's great, and then last one, just switching gears. The M&A environment has seen a little bit of a pickup. Just wondering if you're seeing the pace of conversations pick up? And if you could remind us what you're looking for in a partner size-wise and other characteristics.

We're very consistent. We start with culture and strategy. We only consider institutions that are in strong growth markets. And we've got to be in a position where when we announce the transaction for the sake of both parties, the market reacts positively. And so that certainly means we have strong earnings accretion expectations. We have a real focus on how quickly we can earn back any tangible book dilution and will not stray from those criteria. As to specifics, I'm going to simply say I can't comment right now.

We will take our next question from Andrew Terrell with Stephens.

I wanted to ask on just deposits this quarter, down sequentially in the period kind of in line with the decline in loans we saw. I'm just curious, was any of the deposit decline this quarter reflective of or tied to the de-risking that's going on in the loan portfolio? Or just any color you can provide on the 2Q deposit flows and then kind of tying that into. It sounds like loan growth expectations in the back half of the year for an improvement. Would you expect core funding to increase sequentially?

Andrew, I'm going to begin and quickly hand this off to Aldis, but you nailed it. Yes. I mean, obviously, we're moving the entire relationships when we move credit exposure and that's largely the matter. And then all the sell-through you answer the question more detail for me.

As we've always talked, the outrelationship bank model and both sides of the balance sheet do tend to move in tandem. One thing that we haven't done is go out and buy expensive deposits just to show growth. As evidenced really, if you look at our deposit beta, this last cycle is about 30%. So that shows to do the cost of funds. But to kind of come back, the pipeline is there. Trade management opportunities are there as we look into the second half of the year through relationship opportunities that we're looking to take market share and we look to grow the deposits in the second half as well.

Understood. I appreciate it. If I could ask just on the expense side. I don’t know if you’re able to, but could you share any more color kind of around the expense reduction that happened during the second quarter specifically that it sounds like compensation costs coming down. I'm wondering if that's focused on any specific avenues within the bank or just more broad-based?

Andrew. I'll be happy to take that one touch on our expense reduction plan that we wrapped up in June. I will start by saying we do not take these decisions lightly but in light of the economic uncertainty, we knew it was prudent to be proactive in this area. It was a bank-wide effort and as a result of the actions that we took, we did eliminate positions across our organization, and we had a heavy focus on streamlining our processes and implementing automation.

We will take our next question from Brett Rabatin with Hovde Group.

I wanted to focus on expenses for a moment and clarify the guidance for the $126 million to $128 million for the second half of the year. Does that figure include the $16 million to $17 million from Unifi, or is it in addition to the $126 million to $128 million?

You're right, it is inclusive of the 2 Unifi $16 million to $17 million guide.

It sounds like you all did a great job identifying some expenses to eliminate without needing a restructuring charge. I didn't fully understand the details of the actions you took. Were any of those related to contracts or similar matters? It doesn't seem like it was related to personnel changes.

No, it was a significant reduction in our workforce. While we acknowledge the team's efforts in the second quarter, this work has been in progress for some time, focusing on finding opportunities through natural retirements and attrition to achieve our goals. This approach is a major reason we managed to keep our expenses low. I believe, Nicole, the total related expenses came in under $400,000. Is that correct?

Right. It was about $300,000.

Yes, we will continue to explore opportunities to utilize emerging tools to reduce our core operational expense run rates.

I’ll just add that what we discussed regarding operational efficiency and automation is really exciting because it will allow us to leverage these efficiencies as we grow the company. Our expense run rate will need to keep pace with that growth.

Okay. That's all really helpful. And then Tim, in the past, just back on the loans, it sounds like this quarter was was almost entirely related to reducing some risk exposure. But in the past, you've kind of indicated that maybe some banks or nonbank competitors were being too aggressive with rate or terms. And so I just wanted to hear what you guys are seeing in terms of the environment competitively and if that was any factor in the second quarter?

Yes. Look, I'm going to simply say, and I was reviewing this with our Head of Portfolio Management last week. Our hit rate on term rate on term offerings right now is lower than our historical rate. I mean, we're coming in around 27% to 30% right now. Typically, by the time we get to putting a term sheet on the table, we're seeing a much higher hit rate. And what we're not going to do is renegotiate on credit risk structure or pricing. And so that requires time and patience. And I'll answer your question that way versus talking about competition.

And I'm showing we have no further questions at this time. I will now turn the call back to Mr. Laney for his closing remarks.

Thank you, Rachel, and thank you for joining us today. We appreciate your time and attention. If you have follow-on questions, do not hesitate to reach out to us. and we wish you a good day.

And this concludes today's conference 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.