National Bank Holdings Corporation Price & Performance (NBHC)

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, loan 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 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 Bay Holdings Corporation believes provides useful information for Reconciliations of these non GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations section of ww.nationalbankholdings.com. It is now my pleasure to turn the call over and introduce National Bank Holding 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 Berkans as well as our Chief Financial Nicole Van Denneville. 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 remained cautious during the quarter as did our Our business clients are generally reluctant to engage in capital projects or M and 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 $24,200,000 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 $9,000,000 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 $105,000,000 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 $88,000,000 The linked quarter decrease was primarily driven by two fewer business days and $38,000,000 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 on 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 hundred and $86,000,000 during the quarter and benefited from seasonal tax inflows including the Camber platform deposits. Cost of deposits improved nine basis points during the first quarter to 2.03%. Turning to credit quality.

Our non performing 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 25 basis points during the first quarter to 24 basis points of total loans and now sits at its lowest level over the last twelve months. First quarter's 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 $10,200,000 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 $22,000,000 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 twenty twenty five.

Total non interest income for the first quarter was $15,400,000 Mortgage banking income increased $1,000,000 over the linked quarter.

Service charges and bank card fees were seasonably 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 non interest income to be in the range of $72 to $77,000,000 We remain committed to disciplined, expense management in all environments. Non interest expense for the first quarter was well managed and totaled $62,000,000 This included the benefit of $2,000,000 of payroll tax credit realized during the first quarter. Our two unified development remains on track and we are preparing to provide revenue guidance with twenty twenty five year end results.

Two Unifi expenses totaled $3,400,000 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 $272,000,000 to $278,000,000 We maintained strong levels of liquidity and continue to grow our excess capital. We ended the quarter with a strong TCE ratio of 10.1% Tier one leverage ratio of 10.9% and a common equity Tier one ratio of 13.6%. Tangible book value per share grew 2.6% in the first quarter to $25.94 With that, I will turn the call over to Alden.

Well, you, Nicole, 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 $256,000,000 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 CapEx investments and M and A. Having said that, we still have an upside in our geographies to take market share. And improve our pipeline to 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 NPAs down seven basis points from a year ago and one basis point on a linked quarter basis. Ninety days past due loans are down to just one 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 $186,000,000 during the quarter, And in the process, we lowered our cost of deposits by another nine basis points. Some of the linked quarter growth was driven by tax seasonality that occurred later in the quarter. [indiscernible] 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 the on our expense management. We have accomplished that by finding efficiency 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.

Thank you. And we'll take our first question from the line of Jeff Rulis with D. A. Davidson. Please go ahead.

Hey, Jeff. Good morning. Question on the fraud item. I know that Tim, you said you shared what you could. 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 that it's a non systemic kind of a one off, not related to other Clearly, it's [indiscernible] Yes. It's not. It's one centered in one client. There are no systemic issues here. Thank you. Yeah. That's I'm glad I'll be very glad to clarify that point. Got you. And I guess as it relates to maybe moving to the margin, was there the reported, I guess, $393,000,000 was that impacted at all with I mean, don't know if that's just removed from earning assets? Was there interest loss that impacted I got your guide of the mid $390,000,000 from here. Which suggests a little higher. But I guess just checking on that piece, was that did that impact the margin at all in the quarter?

It did slightly. I'd say at most two basis points because, obviously, it kind of surprised us in first quarter and there's some interest accrual that had to be reversed reversed along the way. And I'd say that's about two basis points of margin impact. [indiscernible] That we did do the investment security purchases At minimum, we reinvested the stuff to be sold late last year in order to keep below $10,000,000,000 in balance sheet. And given the we didn't grow loans as much as we expected, that certainly had [indiscernible] yield mix impact as well on margin calculation. Okay. Thank you. Hey, Jeff. Just coming back. This is Tim. 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's no additional downside exposure to this this client. Or former client.

Got it.

Thanks. And maybe a last one just on on the charge offs. I think you said of the net charge offs, 9,000,000 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, from a sector standpoint? Yes. It was there was nothing specific, as Tim mentioned, back to his remarks. There's nothing call it, systemic or industry specific. It was several others that we we charged off, most of them are actually reserved for us 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, pretty solid. So your expectations ahead for charge off activity would expect to revert towards more historical levels. Is that Is that fair to say? Absolutely, yes.

Yes. And again, if you look at the credit trends, NPAs down, NPLs down, [indiscernible] [indiscernible] find ourselves in 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 Amato with KBW. Please go ahead. Your line is now open.

Hey, good morning, guys. This is Charlie on for Kelly. Thanks for the question. 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 are thinking about the portfolio from that perspective? Thank you. Thank you, Charlie. We We certainly have seen clients working to assess potential impact in their businesses. It's too late too early for us to make a macro call, quite frankly, just given the movement around what potential tariffs might be, where they might land makes that a bit difficult at this point in time. I'll use the most overused word in the English vocabulary. And say, what we have seen is that the uncertainty has led to our clients I think, thoughtfully holding back on capital investments and for example, M and A and yet the good news is we're still seeing they're still seeing demand. So revenues are there, and we think that that's going to translate into the need to return to borrowing. So sorry, I can't give you a better answer on macro tariff impact at this point, but I think if anyone can, I'd love to hear from them.

No, thank you. And, yeah, 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 or beat that from here? Just, like, some detail or color there would be great. Again, I think what we like is we're markets we operate continuously outperform national averages. So we feel like we have a bit of a sale in our wins from that perspective. It is a the uncertainty, what Tim is mentioning, is maybe the component that will continue to we'll watch very carefully and our clients are watching, our prospects are watching carefully. To that point, really, if you look at Page nine of the earnings release and look at our asset class, it wasn't again, it wasn't it's specific group or geography where it slowed down occurred. The slowdown occurred across the whole book. If you look at on that table, virtually every asset class for us was down. So That's great. Thank you. And then maybe one more for me. Just what are your thoughts on capital here? You guys are at healthy levels and historically purchased repurchase shares pretty consistently.

And with the volatility in prices at these levels, just like how are you viewing the buyback going forward? Thanks. We are giving, as you might imagine, buyback more attention than we have in some time. And I'll leave it at that.

Okay. Thank you, guys. I'll step back. Thank you, Charlie.

We'll take our next question from the line of Andrew Torel with Stephens. Please ahead. Your line is now open.

Hey, good morning.

Good morning. Hey, I just wanted to maybe starting back on the growth I mean outside of the fraud issue this quarter, credit seem pretty good and you obviously highlight some of the reductions in NPAs and everything and the forward kind of commentary around credit sounded good. And I also view you guys generally as relatively risk off. But I picked up on comment on the, I think it was Nicole, prepared remarks around operating in more of a risk off posture right now. I'm just trying to juxtapose those two points and specifically want to understand maybe a little more of what operating in a risk off posture means.

Yes. I'll take that. We do believe we operate with a generally conservative conservative posture on credit. And we tend to adjust that posture based on different emerging risk or potential emerging risk in the market marketplace. And certainly, as Aldis suggested, when we think about potential volatility around interest rates, Charlie was just asking about 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, clients, 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 close than ever to our existing clients as we help them deal with these uncertainties. So those 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. Appreciate You bet. If I could just ask on the expenses, I mean, obviously, you guys are tracking very well relative to the guide. 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. Good morning, Andrew. The dollar amount for the payroll tax credits that we realized in the first quarter was 2,000,000 Got it. Okay. Perfect. And then back on just some of the capital discussion, sounds like maybe some interest in buyback from here. But Tim, was hoping you could talk about M and 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 and A relative to the buyback?

Well, candidly, as we sit here this morning, the best acquisition I could make would be of our own shares. So that tells you a little bit about where our heads are at in terms of priorities. In terms of market acquisitions, I would tell you that it has been a difficult market. I think there a lot of institutions and leaders of institutions that are rightfully in a wait and see mode. And I understand that. And of course, we can't announce a fraud hit like we took first quarter and see the impact that it's had on our stock. And be in as great a position to make acquisitions. So we just have to prove to the market that this was, in fact, an anomaly going back to Jeff's question. And I'll add on that my focus is on delivering our all in targeted income growth for the year. We We will, if that means exceeding the low end or doing better than the low end on expenses, that we've guided, we will do that. We will our commitment is to do everything we can to get to our bottom line profitability guidance. So I guess that's and look, we're we should point, we built capital obviously in the quarter.

It's not as though we're not building capital [indiscernible] And again, we continue to believe that that optionality is incredibly critical in this business. I'll also say we're building capital while also investing continuing to invest into Unifi, and no one has asked, but we are still pleased to report that we expect to launch here at the end of this quarter. So [indiscernible] really excited about the future of 2Unify and again, we're doing all of that within the kind of operating guidance that we provided at the onset of the year.

Great. Thank you very much for all the color there, Tim. I'll step back. Thanks.

Yeah. Thanks for the questions.

We'll take our next question from the line of Andrew Liesch with Piper Sandler. Please go ahead. Your line is open.

Just some follow ups on expenses in the fee income guide. So back in or adding back in that the payroll tax benefit, I mean, you're tracking well below that the low end of that range. I guess where should we see expenses increase over the course of this year? Is it more investments to Unify? Is it more on compensation costs? Is Where should we see expenses rise from here on out?

Yes. Good morning, Andrew. Good question. I will point out once we adjust for that $2,000,000 payroll tax benefit for this quarter This quarter's expenses are very much in line with where we were a year ago. So to your point, we continue to do a very good job of managing our expenses and being very disciplined with our expense run rate.

Part of what you will see increase throughout the year is our investment into Unifi. So that has a few different components One, as Tim mentioned, once we go live with two Unifi, we will see an uptick in our expense run rate from the of that capitalized investment that we've made. We also continue to invest in developers to support that build out. And then as we go live, we will be spending with marketing related to two unified So that is some of the ramp up that we're projecting for the remainder of the year.

But you are correct though we are coming in at or below that low end of where we guided.

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 the refi goes live. That the right way to think about it?

Yes, it is.

Got it.

Okay.

And then on the non interest income side, similar commentary, there's a similar question there. In first quarter tracking below the end of the range. Where should we see fee income ramp up? Is it 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 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 we just, again, given the slower loan production not materialize as much on SBA and swaps. But we do expect to put that line item to recover. [indiscernible] Service charges was lower in the first quarter as we have too.

Right, right.

Okay. Thank you for the clarity. I'll step back.

All right. Thank you.

We'll take our next question from the line of Brett Rabatin with Hope Group. Please go ahead. Your line is now open.

Hey, good morning, everyone. Wanted to start off, Tim, the last time we talked, you were indicating that the market had 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 you just sit or do you get more competitive with with the competition to drive some loan growth? Ian, and I believe what I've covered was we were seeing some pressures on both pricing and credit 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 competitors transactions that we simply would not be interested in. As it relates more specifically to your 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 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 price if the clients, for example, keeping enough other balances or enough 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.

And I think Tim covered it really well. I mean, [indiscernible] proof of that is 7.3% in the first quarter in loan origination. We feel very good about that. It's very accretive to our margin and rest of the loan book that is really 6.4%. So pricing really is back in relationship basis 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 you think that's core growth? Any thoughts on those balances and deposits from here?

Yeah. So there's a couple of things to go through that. One is some what they mentioned is a little bit of excess liquidity of the clients that did not necessarily deploy it and in their business growth We also saw a little bit of a tax seasonality. That's primarily in the camber flows that [indiscernible] spot balances later in the quarter. So those are somewhat sticking around for a period of time as those monies are spent. So again, we ended the quarter at 90 ish loan deposit ratio. We like that. See a lot of upside in engagement back to the relationship approach that we take with every client. [indiscernible] view and demand operating accounts from all of our relationships So therefore, we feel like we can grow those deposit balances along the line with a 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 [indiscernible] To buy more? Any thoughts on portfolio and yields from here?

Yes. So we did redeploy all of the cash from our investment security sale that we did in the fourth quarter. In January, we purchased $240,000,000 of investment securities, high quality investment securities, short duration, very consistent with what we historically have held in our book. We were we purchased those right around a 5% yield. Which improved our net interest income because what we sold was about a 2.65%. Aldis, anything you would add?

No, I think the guidance on that was that we will maintain cash in the investment portfolio book at about 15% of the total assets and be able to deliver that this year. And as a reminder, for us, investment portfolio is liquidity portfolio. So back to Nicole's comment, it's highly liquid. Short duration, conservative investments and we don't view that as a store of, call it, deploying capital, for example. So we view 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 [indiscernible] Okay.

Great. Appreciate all the color.

We'll take our next question from the line of Jeff Ruhutlis with D. A. Davidson. Please go ahead.

Thanks. Sorry, I tried to get out of the queue and couldn't pull it off. But I guess one of the questions it was Nicole answered it. With the expense side that just to clarify to get to that low end of the guidance you'd probably have to average close to $70,000,000 non interest expense the rest of the year. And I guess that's coming from back out the payroll benefit as well as a step up into Unify, and I guess you get to that low end. So just the one question I have is is checking back up the two Uniphont Yes. Go ahead.

I have to compliment you. Your math is always very good.

I appreciate it.

Tim.

They're all sitting here smiling and going, not our heads.

Alright.

Well, that's that's rare. Let's see. I Just on the two unified the two unified front, I think you mentioned the revenue contribution reveal, I guess. Was that end of the year or would that be within in January with the Q4 results? [indiscernible] to clarify, it will be released with fourth quarter results and guidance for next year.

Okay.

Great. And our expectation is to be our expectation, in fact, is to begin to build toward a multiyear outlook for two Unifi. That's great. Thanks. Appreciate it.

You bet. You bet.

Thank you. And that is all the time we have for questions. I will now turn the call back to Mr. Laney for his closing remarks.

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 issue. Again, we've turned it over to appropriate authorities 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 of this call, it will be available in approximately twenty four hours and the link will be on the company's website on the Investor Relations page. You very much, and have a great day. You may now disconnect.