National Bank Holdings Corporation (NBHC) Q1 2025 Earnings Report, Transcript and Summary

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

Thank you, Danielle, and good morning. We will begin today's call with prepared remarks followed by a question-and-answer session. I would like to remind you that this conference call will contain forward-looking statements, including, but not limited to, statements regarding the company's strategy, loans, deposits, capital, net interest income, noninterest income, margins, allowance, taxes and noninterest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties and other factors, which are disclosed in more detail in the company's most recent filings with the U.S. Securities and Exchange Commission. These statements speak only as of the date of this call, and National Bank Holdings Corporation undertakes no obligation to update or revise these statements. In addition, the call today will reference certain non-GAAP measures, which National Bank Holdings Corporation believes provides useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations section of www.nationalbankholdings.com. It is now my pleasure to turn the call over and introduce National Bank 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 Birkans; as well as our Chief Financial Officer, Nicole Van Denabeele. We delivered earnings of $0.63 per diluted share during the first quarter, which was negatively impacted by a loan that involves suspected fraudulent activity by a borrower. The matter was discussed and fully addressed, I want to emphasize fully addressed during the quarter. The charge-off is related to a Colorado-based Del Taco franchise and the matter is now in the hands of all appropriate authorities. We delivered a 1.1% return on tangible assets despite this charge-off. Clients remain cautious during the quarter as did our company. Our business clients are generally reluctant to engage in capital projects or M&A until there's more certainty around the economic environment. Likewise, our current posture can best be described as being in a risk-off mode. We've seen clients holding on the higher levels of cash, which is benefiting our deposit balances. Finally, in light of the current environment, we're intensely focused on credit quality as well as expense control, two areas where as you know, we have a solid track record. Nicole, I'll now turn the call over to you for greater detail on the quarter.

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

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

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

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

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

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

Certainly, it's not -- yes, it's not -- it's one centered and one client. There are no systemic issues here. Thank you. Yes, 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, 3.93%, was that impacted at all with -- I mean I don't know if that's just removed from earning assets? Or was there interest loss that impacted, I got your guide of the mid 3.90% from here would suggest 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 to 2 basis points because, obviously, it kind of surprised us in the first quarter, and there's some interest accrual that had to be reversed along the way. So -- and I'd say that's about 2 basis points of margin impact. And I'll say the other one on margin that we did do the investment security purchases. At the minimum, we reinvested this stuff to be sold late last year in order to keep below $10 billion in balance sheet. And given that we didn't grow loans as much as we expected, that certainly had an asset yield mix impact as well on margin calculation.

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

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

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

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

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

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

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

Thank you, Charlie. We certainly have seen clients working to assess potential impact in their businesses. It's 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&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.

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

Well, again I think what we like is where the 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 and our prospects are watching carefully. To that point, really, if you look at Page 9 of the earnings release and look at the -- our asset class. It wasn't -- again, it wasn't a specific group or geography where a slowdown occurred. The slowdown occurred across the whole book. If you look at on that table, virtually every asset class for us was down.

That's great. And then maybe one more for me. Just what are your thoughts on capital here? You guys are at healthy levels. And historically, you've purchased -- repurchased shares pretty consistently? And with the volatility in prices at these levels, just like how are you viewing the buyback going forward?

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

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

I 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 sounding good. And I also view you guys generally is relatively risk off, but I picked up on the comment on the -- I think it was Nicole, your prepared remarks around operating in more of a risk-off posture right now. I'm just trying to juxtapose those 2 points and specifically, I want to understand maybe a little more of what operating and a risk off posture means?

Yes, I'll take that. We do believe we operate with a generally conservative posture on credit. And we tend to adjust that posture based on different emerging risks or potential emerging risk in the marketplace. And certainly, as all this 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, we with no apologies ratchet up our scrutiny around taking market share in an environment like this. We think it's incredibly important to be almost excessively thoughtful in the way we bring new clients into the bank in this environment. And it's our responsibility to be closer than ever to our existing clients as we help them deal with these uncertainties. So those would be examples of where we think we're being accountable and appropriately adding more risk controls in our credit underwriting process.

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

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

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

Well, 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 are 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 this first quarter and see the impact that it's had on our stock. And be in as greater 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 will -- if that means exceeding the low end are 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 should point, we built capital, obviously, in the quarter. It's not as though we're not building capital. 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 in 2UniFi 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 we're really excited about the future of 2UniFi. And again, we're doing all of that within the kind of operating guidance that we provided at the onset of the year.

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

Just some follow-ups on expenses in the fee income guide. So back -- 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 2UniFi? Is it more on compensation costs? Where should we see expenses rise from here on out?

Andrew, good question. I will point out once we adjust for that $2 million 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 in 2UniFi. So that has a few different components. One, once -- as Tim mentioned, once we go live with 2UniFi, we will see an uptick in our expense run rate from the amortization 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 2UniFi. 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 2UniFi go live. Is that the right way to think about it?

Yes, it is.

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

Yes, you got it. So that's probably the most obvious one. If you look at the other noninterest income line item that's unusually low for us this quarter. And I'd say, rounded about a couple of million dollars there between at least those 2 line items that just, again, given the slower loan production did not materialize as much on SBA and swaps. But we do expect to put that line item to recover. And then obviously, in quarter -- service charges was lower in the first quarter as we have it too.

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

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

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

Yes. And I think Tim covered it really well. I mean back to the proof of that is 7.3% in the first quarter in long originations. We feel very good about that. It's very accretive to our margin and rest of the loan book that is really a 6 point...

6.4%.

6.4%. So pricing really is back on the relationship bases is something that we can and know how to adjust for credit. On the other hand, we will not yield on.

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

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

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

Yes. 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 million 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 on the investment portfolio book is about 15% of the total assets and we aim to deliver that this year. And as a reminder, investment portfolio is liquidity portfolio. So back to Nicole's comments, it's highly liquid, short duration, conservative investments, and we don't view that as a store of, call it, deploying capital, for example. So we measure it the just enough amount of money that we need for liquidity purposes to be stored on balance sheet, and that's how we came up with that 15-ish percent guidance.

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

Sorry, I tried to get out of the queue and couldn't pull it off. But I guess, one of the questions that was Nicole answered it with the expense side, just to clarify, to get to that low end of the guidance, you probably have to average close to $70 million noninterest expense for the rest of the year. And I guess that's coming from the -- back out the payroll benefit as well as a step up in 2UniFi, and I guess you get to that low end. Maybe just the 1 question I have is checking back 2UniFi? Yes, go ahead.

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

Appreciate it, Tim.

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

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

Yes. Consistent. Yes, to clarify, it will be released with fourth quarter results and guidance for next year. And our expectation, in fact, is to begin to build toward a multiyear outlook for 2UniFi.

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. Again, we've turned it over to appropriate authorities and believe it will be addressed appropriately. What we're focused on is taking care of our clients, taking care of our teammates and growing this company. So again, thank you for your questions this morning. Have a good day.

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