Operator
Ladies and gentlemen, please stand by. We are about to begin. Good morning, everyone, and welcome to the National Bank Holdings Corporation 2026 Third Quarter Earnings Call. My name is Jess, and I will be your conference operator for today. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Emily Gooden, Chief Accounting Officer and Director of Investor Relations.
Thank you, Jess, 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, non-interest income, margins, allowance, taxes, and non-interest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties, and other factors, which are disclosed in more detail in the company's most recent filings with the U.S. Securities and Exchange Commission. These statements speak only as of the date of this call, and National Bank Holding Corporation undertakes no obligation to update or revise these statements. In addition, the call today will reference certain non-GAAP measures, which National Bank Holding 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 financial 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' third quarter 2026 financial performance. I'm joined by our president, Aldous Birkens, and our chief financial officer, Nicole Van Denneville. We made progress this quarter on important priorities, serving clients, building durable relationships, and advancing the VISTA integration. We also faced significant credit challenges in a small number of commercial loan relationships, primarily in the franchise and healthcare industries. We want to be direct about those events and their impact. We've taken a measured, hands-on approach, completing our collateral assessment, recognizing the credit impact, and applying what we learned. These events are serious, but they are concentrated in specific relationships. Our broader focus remains on serving clients well, growing with discipline, and maintaining the strength and flexibility of the company. We enter the next phase with a committed team, strong client relationships, and clear priorities. We'll discuss the quarter's results, credit performance, and outlook in more detail today, and I want to thank you for your continued interest in National Bank Holdings. With that, I'll turn the call to Nicole to walk us through the financial results. Nicole?
Thank you, Tim, and good morning. For the third quarter, we reported a net loss of $8.8 million, or $0.20 per diluted share. On an adjusted basis, removing the impact of acquisition and restructuring expenses in the quarter, we reported net income of $2.9 million, or $0.06 of earnings per diluted share. As we shared earlier this month, the third quarter's results were impacted by elevated provision expense related to a handful of specifically identified credits addressed during the quarter, as well as an impairment on one third-party fintech investment. Core banking activities remained strong, with an increase in year-to-date pre-provision net revenue of 8% annualized. During the quarter, loan production was solid, and we grew average deposits by 3.7% annualized, while maintaining a top quartile net interest margin. Also, we successfully completed our Vista Bank core systems integration during the quarter, and executed the remaining expense reduction actions. Turning to the balance sheet, client activity was strong during the quarter. Our teams generated quarterly loan origination of $819 million, driving year-to-date annual life loan growth of 8.1%. Pipelines remain strong, and we expect to achieve full-year loan portfolio growth of 10%. Fully taxable equivalent net interest income increased 13% annualized for the quarter to $115.2 million. Net interest margin during the third quarter was a strong 4%. We expect a net interest margin near 4% for the remainder of the year, which does not include any future interest rate policy changes by the Fed. We continue to fund our loan growth with core deposits. Average total deposits grew $96 million, or 3.7% annualized during the quarter, And average transaction deposits grew $103 million, or 4.6% annualized. We remain disciplined in managing deposit costs, with only one basis point of deposit cost increased for the quarter, and ended September with a low cost of deposits of 1.96%. Total cost of funds increased two basis points to 2.03% for the quarter. The loan-to-deposit ratio ended the quarter at 93.8%. Turning to asset quality, we recorded $40.6 million of provision expense to cover the quarter's elevated net charge-off. As previously disclosed, third quarter net charge-off totaled $46.3 million, reflecting actions taken on specific Commercial loans following adverse credit events during the quarter. These credits also resulted in non-performing assets increasing by 15 basis points or $15 million. Additionally, we hold $14.3 million of marks against our acquired loan portfolio, which provides an additional 15 basis points of loan loss coverage if applied across the entire loan book. Turning to fee income. Non-interest income totaled $13.5 million and, as previously disclosed, was impacted by a $4 million impairment on one third-party fintech investment. All this will share more on fee income momentarily. We expect fourth quarter fee income to be in the range of $17 to $18 million. Non-interest expense totaled $97.8 million for the quarter, And included $15.2 million of acquisition and restructuring expenses. Excluding these one-time items, non-interest expense was $82.6 million, a decrease of $1.1 million from the prior quarter. The third quarter included one additional payroll day compared to the second quarter and included elevated problem loan expense of $1.4 million for the quarter. We have fully executed on our cost-savings strategies, and as a result of our strong execution, we expect a clean expense run rate in the fourth quarter with core non-interest expense in the range of $75 to $77 million. Our capital levels remain well in excess of well-capitalized regulatory thresholds. Common equity tier one ratio ended the quarter at 11.7%, and our total capital ratio was 14.7%. The tangible common equity ratio ended the quarter at 9.2%. Tangible book value per share was $25.37, reflecting the quarterly dividend payout and $12 million of share repurchases during the quarter. Importantly, we continue to target quarterly earnings in excess of a dollar per share in the fourth quarter. With that, I will turn the call over to Aldis.
Thank you, Nicole. Let me begin with credit. As Tim shared, this was a disappointing quarter for us, and we recognized the importance of addressing both the immediate issues and their underlying clauses. This quarter's loan losses were concentrated in the franchise and healthcare verticals within our specialty banking group. So over the past 12 months, we have top-graded our specialty banking team leadership, and during the third quarter, we conducted additional in-depth reviews and implemented further enhancements across our credit. Credit risk governance. These steps are intended to strengthen accountability and improve consistency on how risk is identified, escalated, and managed. Throughout the year, we also have diversified these portfolios, and our current exposure is limited to approximately 5% of total loans in franchise and approximately 3% in healthcare finance on a new model for serving small business clients. Under the new model, we will lean more heavily into our banking center network with an increased focus on deposit gathering. The objective is to create a more consistent client experience and align resources more closely with the needs and economics of this segment. We expect these organizational changes to reduce our operating expenses by approximately $4 million annually. Turning to the loan book, on an annualized basis, loans grew 5% during the quarter, bringing year-to-date growth to 8.1%. Our teams successfully completed the VISTA core system integration, an important milestone that positions us to operate on a unified platform and focus fully on serving clients. With this achievement behind us, our teams are focused on growth, and our pipelines continue to build heading into the fourth quarter. We remain on track to deliver 10% loan growth for full year 2026. Achieving that level of growth would take our total loans outstanding to about $10.1 billion by year end. Deposits grew a solid 3.7% annualized during the quarter, led by 4.6% annualized growth in average transaction deposits, reflecting continued strength in our core deposit franchise and our focus on growing high-quality relationship-based funding. This favorable deposit mix, combined with disciplined balance sheet management, contributed to a strong 4% net interest margin for the quarter. And finally, turning to the fee income, the underlying performance of our core banking business remains solid. During the quarter, combined service charges and bank card fees grew at an annualized rate of 12%, reflecting continued momentum from these recurring revenue streams. Additionally, we continue to see solid contributions from our Canberra and trust-involved teams. On the strength of our core franchise, improving operating discipline, and growing client pipelines, we enter the fourth quarter with the confidence in our ability to build on this momentum.
Tim, with that, I will turn it back to you. Thanks, Aldis. Well, we've covered a lot of detail in our opening comments, so why don't I go ahead and open up the call for questions.
Operator
Thank you. Ladies and gentlemen, if you would like to ask a question, you can signal by pressing star 1 on your telephone keypad. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal.
And we'll go first to Jeff Rulis with D.A. Davidson.
Thanks. Good morning. Good morning.
Just to, I guess, the first fit on credit, just to kind of, if you could, could you itemize the size of those credits, both in the franchise and healthcare, the resolution path ahead, and then lastly, expectation for net charge-off levels going forward, or is this sort of in the rear view? Thanks.
Yeah, Jeff, good morning. This is Nicole. So, related to your charge-off question on the credits that we addressed in the third quarter, we addressed a principal balance of credits totaling about $65 million, and we took net charge-offs on those credits of about $47 million. That leaves a remaining balance of $18 million on our books related to those credits, and those are supported by collateral and personal guarantees of the borrowers.
Okay. Just the makeup of the $65 million in credits, what was franchise and what was healthcare? Or what's left? It's fine.
Jeff, I'll start with high level, and then perhaps Saldis can fill in with a bit more detail. But when you size this up, and we talk about a handful of credits, the reality is this was an event primarily centered in two credits, one franchise, one healthcare. The franchise, of course, was this Cordova, Dave's Hot Chicken franchise that we have dealt with where the first issues, frankly, came to light in July. By August, we were in a process of seeing some retrading on really the sell of the collateral involved to cover our loan exposure and found ourselves, frankly, found ourselves in that situation in a position where we believed it was merited to file suspicious activity reports. And the situation, it was healthcare-related. It conducted a full voucher with the client, brought in a third-party consultant, believes management was in a position to move those other divisions, and left us in a position of working with the borrower to take the company into bankruptcy. So those are the two big drivers. I don't know if you want to discuss the breakdown as it relates to franchise. And by the way, we do not, the practical matter, when we review our credit policies and practices, our risk management policies and practices over the life of our company, they've served us well. These were cases where, frankly, the bankers involved did not execute on our policies and practices, and those bankers are no longer with us.
Yeah, Jeff, off that 65 that Nicole mentioned, approximately 45% is healthcare, 45% is franchise.
Thank you, Aldis. And the net charge-off question was going forward. We got it in the release what you charged off, but the expectation for just the overall bank ahead and the charge-off expectations, is there any further cleanup, or we revert to sort of historical levels? Q4 and beyond.
Yeah, our expectation is that we've addressed what needed to be addressed this quarter such that we expect normalized levels going forward.
Thanks. And then all this, if I could hop to the margin, or Nicole, sorry, was there any impact on the margin in terms of If loans placed on nonaccrual in terms of lost interest or – and then on the outlook, sounds like around four, if you could outline, should we have another rate hike, what the impact of that would be? Thanks.
Yes. Yeah, I'll take that one, Jeff. So, yeah, you're heading on a few good points of, you know, consistently there will be puts and takes to our margin. We did have some interest reversals in margin for the quarter. We also had some pickup from accelerated accretion. I will say those two kind of washed in the quarter. We exited September with a 4% margin, and our expectation is that we'll be able to hold that for Q4. Regarding your question of, you know, what do we expect the impact to margin will be with future rate changes, I will take us back to the last time that we were in a rates-up environment. We were successful at maintaining our deposit costs, and through that rates-up cycle, we held a deposit beta of under 40%. So, we believe we'll continue to be able to be disciplined on our deposit pricing.
Thanks, Nicole. If I could squeeze one more in there. On the merger costs, any chance you could map those in terms of did a lot of that come in the comp or other, just trying to back that out of the current quarter?
Yeah, I'll say it's largely been concentrated within the compensation and benefits line. There's really impacts hitting in all lines, you know, occupancy and equipment, processing fees, and professional fees, but the bulk of what hit the third quarter and, frankly, for the year has been in personnel expense.
Okay. Thank you. Appreciate it. Thank you, Jeff.
We will go next to Kelly Mata with KBW.
Hey, good morning. On your core expense guide of $75 to $77 million for Q4, you also noted there was about $4 million annual benefit from some of the changes you've made in the business. I know you have the benefit of the post-conversion expense run rate. Just wondering what of the $4 million benefit might be already baked into that Q4 number? Thanks.
It is, Kelly. So that $4 million that I talked about in terms of the reorganization and how we go to market for business banking or small business is embedded. And along to what Nicole was saying, it will show up mostly in the benefits and salaries line.
Got it. That's helpful. And then with the credit, it was obviously a disappointing quarter. You've noted you've made some changes, some changes in personnel, and exposure is fairly limited at this point. Just wondering if, as part of the identified issues and changes, if you've done a third-party review of these books, or if there's – what gives you comfort that this is now behind you? Thanks.
No, as I mentioned in my prepared remarks, we delved in quite closely to the full portfolio with a very much closer eye to the portfolio originated by the bankers that Tim mentioned, our loan review team, our SAG team, our credit officers have gone through it, and we feel very comfortable where we are today with portfolio looking forward. I will say also that throughout the year, we've worked very hard on turning that book away from either brands or operators that didn't like, to put it bluntly, and $150 million of the franchise book has been turned over year to date. Right.
And I think that's an important point, Kelly, is, you know, we haven't, this isn't a process that just began in the third quarter. We've been working this franchise exposure since the fourth quarter of last year and, again, have methodically exited over $150 million of exposure that we felt was not originated against the standards that.
Okay, got it. And then your release noted the expected sale of the Palm Beach location. Just wondering if, I think you gave the loans and I believe the deposits associated with this action expected to take place next year, but wondering overall financial impact, you know, if there's maybe some additional expenses that come out.
It will end up having minimal impact to our earnings per share. There will be some expenses that come out. I think it should be right around half a million. No, it's two million.
It's 2 million, half a million, you think, in terms of because of the timing of this, but on an annualized basis, about 2 million of operating expense that comes out of the books on an annualized basis. As we mentioned in the release, about $200 million for loans and deposits. You apply 4% margin, you can see what the revenue is given up. So to Nicole's point, once you net that out, it's really nominal EPS impact.
And I would just add strategically, look, it's a fine operation, a solid, smaller team, and, you know, what we believe is we can generate greater returns focusing on our core markets and continuing to build those core markets. And so we were able to really create a win-win transaction here with the team that has run that bank. And we think we've ended up in a varied transaction for both parties. So that's where I would leave that.
Got it. That's helpful. I guess last question for me, it looks like the fee guidance is a bit lighter than maybe what was implied for the full year. I imagine maybe some weakness in mortgage obviously has something to do with that. Just wondering if you could kind of break down the changes in the outlook here today versus what you may have been expecting a quarter or two ago. Thanks.
Kaylee, this is Aldis. You picked up on the main driver in a change, and that one is the mortgage. It's a residential mortgage business. It certainly has been impacted by the steeper and higher rate environment, conventional mortgages being about 7%. The gain on sale is, or secondary market, is quite tough. Having said that, we have seen a bit more volume go on the portfolio. You can see that in our loan tables. We had a nice portfolio growth in the residential mortgage, but in terms of gain on sale, it is tougher going, especially going in the fourth quarter, that seasonally low quarter.
Got it. Thank you so much. We will go next to Matthew Clark with Piper Sandler.
Good morning. Just on the – you mentioned churning about $150 million on the franchise side. How much did you kind of churn or de-risk within the healthcare portfolio? I guess that's my first question. Thanks.
Yeah, Matthew, actually a similar dollar amount, $150 million portfolio is down on getting 100% or 10% loan growth. That's something that we consciously have been working behind the scenes to do risk the portfolio in general, but continue to meet our loan.
Great. And then just around the series of personnel changes, did that include a new chief credit officer? And if so, has he had a look at the overall portfolio and blessed it, or is that process still underway?
We have brought in a new chief credit officer over the last year and a half, and he has certainly engaged, unlike ever before, in all of the detailed reviews that have been conducted. We did exit a number of senior credit officers that were involved in, frankly, the oversight of the bankers that have also moved on. And, you know, obviously, those are painful actions, but actions we felt necessary to ensure that our policies and practices when it comes to risk management are respected and well executed.
Great. And then just criticized loans or assets, where they stood at the end of September. I think they were, according to the Q, $298 million or 3.05% at the end of June.
Yeah, criticized assets at September were 3.4%, so a slight uptick. But classified, I'll say, were flat to prior quarter at 1.38%.
Great. And then just the purchase accounting accretion impact the dollars this quarter?
Yeah. Good morning, Matthew. I'll touch on that one. So, as I mentioned previously, we did have some puts and takes to margin this quarter. We had some impact of accelerated loan accretion that impacted the quarter, but that was largely offset by some non-accrual interest reversals. So, the NIM that you're seeing is a core NIM.
Right, but in terms of dollars, so we can model the yield and the accretion. So, interest reversal, how much was that in dollars, and how much in accretion in dollars, even though they offset?
We haven't historically provided that, and the reason is it's never been really material to our margin or loan yields. We'd like to keep it that way until unless we do an acquisition that it's so material that it makes a difference. Well, certainly, they'll disclose it at that time, but historically, it has not been, and they'll keep it that way.
Okay. Fair enough. Thanks.
Operator
Thank you, 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.
Well, again, thank you for your continued interest in National Bank Holdings, and I wish you all a good day.
Operator
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 events and presentations page. Thank you very much, and have a great day. You may now disconnect.
