Earnings Call Transcript - NBHC Q3 2025

Operator, Operator

Good morning, everyone and welcome to the National Bank Holdings Corporation 2025 Third Quarter Earnings Call. My name is Shelley and I will be your conference operator for 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. Please go ahead.

Emily Gooden, Chief Accounting Officer and Director of Investor Relations

Thank you, Shelley 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.

Tim Laney, Chairman and CEO

Thank you, Emily. That's one of the more enthusiastic readouts of disclaimers I've heard in a while. That was great. So thank you. Good morning, all and thanks for joining us as we discuss National Bank Holdings third quarter earnings results. I'm joined by our President, Aldis Birkans, as well as our Chief Financial Officer, Nicole Van Denabeele. We're pleased to have delivered $0.96 of earnings per diluted share and a return on tangible common equity of 14.72%. And it should be noted that this return was achieved while maintaining a high level of capital. We were able to deliver these results despite continued headwinds related to a heavy volume of payoffs coming primarily out of our CRE portfolio. Now having said this, I'm proud of our team's new loan production during the quarter and the quality of the new relationships is very strong. We're pleased to announce our merger with Vista Bancshares or to have announced our merger with Vista Bancshares during the quarter. I'll have to say the more we learn about the quality of our new teammates, the more excited we become about future possibilities. And we believe we're set up for a nice fourth quarter. New relationship activity is strong. Credit quality trends continue to be positive. We have additional productivity initiatives in the work and we believe we have some very positive possibilities for 2UniFi. So on that note, I'll turn the call over to Nicole to cover the quarter in greater detail. Nicole?

Nicole Van Denabeele, Chief Financial Officer

Thank you, Tim and good morning. During today's call, I will cover the financial results for the third quarter as well as touch on our guidance for the remainder of the year, which does not include any future interest rate policy changes by the Fed. For the third quarter, we reported net income of $35.3 million or $0.92 of earnings per diluted share. We recently announced our planned merger with Vista Bank and we remain on track to close in the first quarter. In conjunction with the acquisition work, we incurred approximately $1.7 million in deal-related expenses during the quarter. Excluding the acquisition expenses, adjusted net income increased 30% annualized over the prior quarter to $36.6 million or $0.96 of earnings per diluted share. This resulted in a strong adjusted return on average tangible assets of 1.6% and an adjusted return on average tangible common equity of 14.7% on an elevated equity base. During the third quarter, we grew our fully taxable equivalent adjusted pre-provision net revenue by 17.5% annualized over the prior quarter, maintained a top quartile net interest margin and built additional excess capital. Also during the quarter, our teams generated $421 million of loan fundings, bringing total year-to-date loan fundings to $1 billion. Quarterly loan fundings have increased each quarter of 2025 and our bankers continue to build loan pipeline. Aldis will touch on the loan paydown headwinds we've been experiencing in his comments. Our disciplined approach to loan and deposit pricing over the last 12 months has resulted in solid margin expansion. Fully taxable equivalent net interest margin expanded 3 basis points during the third quarter to 3.98%, which is 11 basis points of margin expansion over the same quarter last year. For the remainder of 2025, we project fully taxable equivalent net interest margin to remain in the mid-3.9s. And as I mentioned earlier, this does not incorporate any future interest rate decisions by the Fed. Credit quality improved during the quarter with a 20% reduction in nonperforming loans, which now stand at just $27 million. Our nonperforming loan ratio improved 9 basis points during the quarter to 36 basis points, which is 10 basis points lower than year-end levels. As a result of proactive efforts to resolve problem loans, we realized net recoveries of 5 basis points annualized during the quarter. The allowance to total loans ratio remained consistent at 1.2%. Additionally, we continue to hold $18 million of reserve against our acquired loan portfolio, which adds an additional 24 basis points of loan loss coverage if applied across the entire loan portfolio. Turning to deposits. Total deposits ended the quarter $202 million higher than the prior quarter end and average deposits held steady at $8.2 billion. Cost of deposits totaled 2.08% and our total cost of funds was 2.1%. Noninterest income for the third quarter totaled $20.7 million, 21% higher than the second quarter and 13% higher than the third quarter of last year. The quarter benefited from $3.5 million of unrealized gains on partnership investments as well as higher service charges and mortgage banking income over the prior quarter. For the remainder of 2025, we project our total noninterest income to be in the range of $15 million to $17 million. We are pleased to have launched 2UniFi during the quarter and we plan to provide 2UniFi revenue guidance during our next quarterly earnings call. Noninterest expense totaled $67.2 million and included $1.7 million of acquisition expenses and $6.2 million of 2UniFi expense. Now that we are live with 2UniFi, our linked quarter 2UniFi expense increased as expected with the amortization of the associated capitalized development assets. When adjusting for the acquisition expenses and increased 2UniFi expense impacting the quarter, we remain on track to deliver the results expected from the expense reduction actions taken during the second quarter. As a result, we project core noninterest expense for the remainder of the year to be in the range of $64 million to $66 million before the impact of acquisition-related expenses. We maintained strong levels of liquidity and continue to build excess capital. We ended the quarter with a strong TCE ratio of 10.6%, Tier 1 leverage ratio of 11.5% and a common equity Tier 1 ratio of 14.7%. We repurchased 240,000 shares during the quarter, totaling $8.9 million, bringing total shares repurchased year-to-date to 359,000 shares. During the third quarter, our tangible book value per share grew 12% annualized to $27.45. With that, I will turn the call over to Aldis.

Aldis Birkans, President

Thank you, Nicole and good morning. Let me start by saying that our preparations for the Vista merger are progressing well and remain on track. Vista reported strong financial results for the third quarter, which further validate the strategic value of this transaction and we continue to be very excited about what this partnership will bring to our combined organization. For NBH this quarter, we saw loan production return to more normalized levels with total loan fundings of $421 million. Fundings were led by commercial banking, particularly in our C&I portfolio, which expanded at an annualized rate of 8.7%. This reflects a healthy rebound in client activity and continued progress in building our relationship-driven commercial franchise. While we are encouraged by this growth, overall loan portfolio outstandings were tempered by continued loan paydowns, particularly in certain CRE categories where stabilized properties have moved to permanent financing. At quarter end, our total nonowner-occupied CRE to total risk-based capital ratio stood at a low 132%, reflecting a well-balanced risk profile. On a pro forma basis, incorporating the pending Vista transaction, we expect to remain comfortably below the 200% level. Credit metrics continue to demonstrate a stable loan portfolio with improving trends. Both classified and criticized assets declined during the third quarter. Nonperforming assets decreased by another $6.3 million, with the NPA ratio improving by 8 basis points from the prior quarter and by 10 basis points on a year-to-date basis. Overall, we are pleased with the return to normalized loan production, the strength in our C&I portfolio and the disciplined management of our CRE exposure, all of which position us well for sustainable, high-quality growth going forward. A good example of our relationship banking success this quarter was in core deposits, which grew approximately $200 million from linked quarter on a balance basis, with nearly half of that growth coming from noninterest-bearing transaction deposits. Regarding deposit costs, we expect to see a decrease in the fourth quarter as a result of actions taken in late September following the most recent Fed rate cut. We also are prepared to take additional measures should the Fed continue on its rate-cutting path. One final note on deposits. In the fourth quarter, we plan to use the flexibility provided by our CAMBR deposits to manage our balance sheet and remain below the $10 billion threshold. Lastly, I'd like to highlight the strong performance from our long-standing fintech partnership investments, which delivered $3.5 million in gains included in this quarter's financials. While the results from these initiatives may not always move in a straight line, we continue to expect positive financial and strategic outcomes over the long term. Tim, I'll turn it back to you.

Tim Laney, Chairman and CEO

Thanks, Aldis. Well, we had an active third quarter. We generated $421 million in loan fundings. We had solid deposit growth. We maintained pricing discipline, resulting in a net interest margin of 3.98%. We experienced a decline in classified and criticized assets accompanied by a nice decrease in nonperforming assets. We grew our tangible book value per share 12% annualized during the quarter and we announced a meaningful acquisition of Vista Bancshares. And on that note, Shelley, I would ask you to open up the call for questions.

Operator, Operator

And we'll now take your first question from Jeff Rulis with D.A. Davidson.

Jeff Rulis, Analyst

Wanted to dig into the margin in a little more detail. The mid-3.90 guide, talking about entering the quarter with some lower deposit costs. Just kind of engage with that a little bit more on what looks like rate cuts that are a near certainty, the impact of which and maybe the push and pull of why at 3.98%, you're kind of pulling it back down, I suppose, absent cuts but maybe you could touch on the expected impact there.

Nicole Van Denabeele, Chief Financial Officer

Yes. This is Nicole. I'll mention that the third quarter's margin was positively impacted by about $0.5 million of interest and fees recovered on the large recovery that we had in the quarter. That was about 2 basis points of margin impact. So we still feel good, solid mid-3.9s margin for the quarter. Looking ahead to the potential for rate cuts in Q4, the very likely outcome of a rate cut next week, our teams have started teeing up actions to take down deposit rates in line with the Fed. We have a history of being very disciplined, both on rates up and rates down cycles of managing our rates on both sides of the balance sheet and we are prepared to take those actions next week. And we do believe for that rate cut that those deposit actions that we have planned will offset the impact of the repricing on our variable loan portfolio.

Jeff Rulis, Analyst

Okay. Really helpful. I appreciate it. On the expense side, regarding the 2UniFi step-up, can we consider that to be part of the run rate now? Do you anticipate an increase again in the coming quarters? I'm looking for more insight into the expense buildup, if any, related to that aspect before we gain visibility on revenue potential in the fourth quarter call.

Nicole Van Denabeele, Chief Financial Officer

Yes, on the topic of 2UniFi expenses, that step-up this quarter was expected in line with launching 2UniFi. We were expecting a step-up in depreciation expense of that capitalized development asset. We will continue to invest in marketing for 2UniFi. And then as we onboard 2UniFi clients, there's a component of some variable expense that will come online as well.

Jeff Rulis, Analyst

If we take a broader look at the expenses for 2026, I don’t want to get ahead of you as you finalize the budgets. However, considering the inclusion of 2UniFi, I understand you've taken steps to reduce costs. Could you provide insights on the overall growth of expenses anticipated for 2026 or perhaps outline the factors influencing this, starting from the $65 million core we discussed for the fourth quarter?

Tim Laney, Chairman and CEO

Jeff, this is Tim. We're currently engaged in some intriguing partnership discussions regarding 2UniFi. At this time, we are not able to provide further details about what might occur in '26. However, we remain committed, as Nicole mentioned earlier, to address 2UniFi in our fourth quarter earnings call. Even with the increase in amortization and depreciation projected for next year on 2UniFi, we aim to keep those expenses relatively flat, assuming everything remains the same. As of now, we can't share any more details on 2U.

Operator, Operator

Your next question is coming from the line of Kelly Motta with KBW.

Kelly Motta, Analyst

Maybe turning back to loan growth. It was nice to see a step-up in production. I see balances were down. Can you speak to whether there were any paydowns? I know in prior quarters, you had been managing the book for credit. Was there any kind of factors affecting that? And if you could provide an outlook, given what sounds like strength in the pipelines, what the expectations are ahead, do you expect to reverse this trend in Q4?

Tim Laney, Chairman and CEO

Thanks, Kelly. This is Tim. I'll start and then pass it to Aldis. I want to clarify that the reduction in volume during the third quarter wasn't due to directive paydowns. We believe we've addressed any risks in the portfolio that needed our attention considering the macroeconomic situation. In the third quarter, we primarily observed a significant volume of payoffs as temporary or construction financing transitioned to permanent financing under favorable terms from alternative lenders. Honestly, private credit has continued to enter the market, providing loans with credit terms and pricing that I find difficult to comprehend after decades in this field, as we've seen competition in price and credit terms from private credit that we cannot match. Now, I'll hand it over to Aldis to discuss how we plan to navigate this situation because we are optimistic about our pipeline and our current position, especially regarding our commercial real estate portfolio.

Aldis Birkans, President

Yes. Thanks, Tim. I'll just add, on the Page 10 of the investor deck on the loan summary table, it actually kind of is visible. If you look at our commercial real estate production itself was pretty healthy this quarter. But embedded, we kind of had, I'll call it, between $100 million to $150 million headwind from those paydowns that Tim was mentioning and those are in the table above that you can see on between our originated and acquired books. Looking at the fourth quarter, our pipelines, entering this quarter look very healthy, very good. We are optimistic that we return to growth subject to this behavior that we just discussed. But other than that, I'm very optimistic about the fourth quarter.

Kelly Motta, Analyst

Got it. That's helpful. Regarding expenses, you announced the cost-saving plan last July. Did we fully benefit from that this quarter? Also, I apologize if I missed it, but can you share how much 2UniFi expenses were in Q3 and what's included in the $64 million to $66 million for Q4?

Nicole Van Denabeele, Chief Financial Officer

Yes. I'll take that one. We've been closely monitoring our progress on the expense reduction actions that we announced last quarter and we are delivering on those commitments. You're right, Q3 was a little noisy. It was impacted by $1.7 million of acquisition expenses, $6.2 million of 2UniFi expenses. The third quarter, it was impacted by higher mortgage commissions. We view that as a positive because it was driven by higher mortgage revenues. And then there were a couple of other timing impacts in the third quarter. We had about a $700,000 fair value adjustment on our deferred comp liability and then we were impacted by the timing of certain occupancy and equipment expenses.

Kelly Motta, Analyst

Got it. I think the last thing was how much 2UniFi is in the Q4 run rate?

Nicole Van Denabeele, Chief Financial Officer

Yes. In the Q4 run rate, we're expecting 2UniFi expenses somewhere in the range of $7 million to $9 million. And that does account for some step-up in marketing spend and variable costs associated with user increases.

Kelly Motta, Analyst

Got it. That's helpful. Last question for me. You announced an exciting acquisition last month that's on track to close next quarter. I’m curious if you have noticed an increase in discussions, clearly you’re in the market given your announcement. Could you share if you've seen any surge of inquiries following that announcement?

Tim Laney, Chairman and CEO

Kelly, I think I've slept in my own bed 4 nights over the last 3 weeks. There have been a lot of discussions and we remain focused across our existing footprint. We would love to do more in Texas and build on what John and his team at Vista have built. And we're seeing other interesting opportunities that we think could create meaningful market share step-ups in markets that we already do business with. So the short answer to your question is, yes, we're very active.

Operator, Operator

Next question is coming from the line of Andrew Terrell with Stephens.

Andrew Terrell, Analyst

Tim, I want to ask a question around just 2UniFi. And I also don't want to front run any conversation we'll have in January and I get that maybe not too much to share here. But I guess I'm just curious from a big picture standpoint, you guys have been pretty clear on some of the expense recently associated with that. And it sounds like marketing spend could ramp and then there's also maybe a variable component as you begin onboarding clients from an expense standpoint. I'm just curious, when you look near to medium term, how long do you think it takes to generate positive operating leverage? And do you feel like you have near-term visibility to positive operating leverage in that business?

Tim Laney, Chairman and CEO

I appreciate your question and will reiterate that we will share all those details on our fourth quarter earnings call. I also want to emphasize, as I mentioned earlier, that we are currently engaged in a crucial partnership discussion that we believe could significantly influence the direction of 2UniFi. Therefore, it's not appropriate to delve deeper into 2UniFi at this time.

Andrew Terrell, Analyst

Understood. I appreciate. Yes, I had to give it a shot there. And I was also interested just on your discussion around private credit and the competition you guys are experiencing there. And I'm curious, Tim, if you could share any more specifically around where you're seeing that either geographically, from product type? Just any more color on where you're seeing private credit be most competitive?

Tim Laney, Chairman and CEO

Yes. I mean, really primarily in the commercial real estate sectors. And I would tell you that's the vast majority of the action we're seeing there.

Andrew Terrell, Analyst

Yes. Okay. And then last one for me. Just I thought you guys bought back a little bit of stock this quarter. Your capital is still built very nicely. You'll close Vista but still have a pretty strong capital position. I know it sounds like interested in future M&A but any interest in further capital deployment in the buyback?

Aldis Birkans, President

Yes, Andrew, this is Aldis. As you pointed out, we purchased approximately $8 million in capital. We still have about $35 million to $36 million in authorization remaining. We plan to use it opportunistically in our discussions with potential M&A targets. It's also important to note that we achieved a 12% growth in tangible book value this quarter, building on the $8 million buyback. We feel very positive about our capital accumulation over the last year with strong excess capital levels, and we are exploring potential strategic options.

Operator, Operator

And your next question will be coming from the line of Brett Rabatin with Hovde Group.

Brett Rabatin, Analyst

I won't ask about 2UniFi. I wanted to revisit the payoffs. I know we've discussed that quite a bit, but I want to ensure that you are expecting improved trends in the fourth quarter, apart from private credit. How does the current shape of the yield curve, particularly with the longer end tightening, affect the commercial real estate portfolio? Do you have any insight into the stability of the CRE book? Any thoughts on the yield curve moving forward in relation to that portfolio?

Aldis Birkans, President

Not at this moment. I don't believe we've observed any paydown or prepay according to our bankers, in light of the refinancing opportunities and lower yields. However, that doesn't mean it won't happen at some point. But as of now, the shape of the yield curve has not influenced our paydown activity.

Brett Rabatin, Analyst

Okay. And then the other question I had was just around the Vista deal. And Tim, it sounds like you've been on the road quite a bit. Just was hoping to hear, I know one of the aspects of the transaction that you're excited about is treasury management, wealth and trust. Any thoughts relative to the deal call on fee income and those things specifically?

Tim Laney, Chairman and CEO

I am really enthusiastic about the leadership quality and the new team members joining us from Vista Bancshares. They have done an impressive job capturing market share in a key area like Dallas, Texas, and I expect that trend to continue. The merger of our teams will greatly enhance our strength, and we will be utilizing the talented individuals from Vista throughout our organization. We are dedicated to implementing best practices from both NBH and Vista. We will be offering a much wider range of treasury management services in Texas, leveraging NBH's extensive treasury capabilities. We are particularly excited about our potential in the trust and wealth management sector. Previously, Vista had outsourced these services, but with our trust business based in Wyoming, we can provide these opportunities to clients in Texas, mirroring our efforts across the rest of our operations. I am genuinely optimistic about this. I believe our capabilities in Wyoming, especially for clients who prioritize privacy and control over their trusts, represent one of our best-kept secrets. As we communicate this more effectively, I anticipate exceptional growth. Vista has established a robust private banking division and has also been outsourcing trust and wealth management services. The chance to bring these functions in-house is very promising. Aldis, I would like you to share your thoughts on this.

Aldis Birkans, President

I'll just say that we're not waiting until first quarter when we come together to start working on these partnerships. John and I have weekly calls and we bring our teams together. And to the extent that they already are handing off those opportunities someplace else, we'd rather be there in the fourth quarter already picking up those opportunities. So that work is underway and those synergies should be hopefully start showing their benefits here in the fourth quarter.

Kelly Motta, Analyst

I think you're kind of, while we have you, NBH has been great at managing credit. You did have that one idiosyncratic loan, I think, in 1Q but otherwise, it's been really strong. Tim, Aldis, I'm just wondering, given the focus on NBFI lending, it doesn't look like NBH has much exposure here. Wondering if you have some high-level thoughts as to potential risks and anything else that you might be direct analysts to more carefully watch.

Aldis Birkans, President

Yes. We really don't have any thoughts because we really don't have much of that. It's well below 1% of total loans.

Tim Laney, Chairman and CEO

But that's indicative of our thoughts. We need to keep a close watch on various sectors. In agriculture, there are commodity row crops and their associated vulnerabilities. While our exposure in this area is limited, cattle operations are performing exceptionally well historically. However, being exposed to commodities could be challenging. Transportation continues to face significant difficulties, and we've proactively worked to minimize our exposure there. It seems like truckers will have a long road ahead for recovery. These are a couple of areas we would monitor closely if we were on the investor side.

Operator, Operator

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.

Tim Laney, Chairman and CEO

Thank you, Shelley. I'll be brief. Just thank you so much for your time and attention this morning. Please feel free to reach out to us if you have any additional questions and we will respond promptly. Have a great day.

Operator, 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 Investor Relations page. Thank you very much and have a great day. You may now disconnect.