National Bank Holdings Corporation (NBHC) Q3 2025 Earnings Report, Transcript and Summary

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. [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. Please go ahead.

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.

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?

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 expense -- 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 [ marks ] 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.

Thank you, Nicole and good morning. Let me start by saying that our preparations for Vista merger are progressing well and remain on track. Vista reported strong financial results for 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 are also -- 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 these 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.

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 Instructions] And we'll now take your first question coming from the line of Jeff Rulis with D.A. Davidson.

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.

Yes. This is Nicole. I'll mention that the third quarter's margin, it 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, that deposit actions that we have planned will offset the impact of the repricing on our variable loan portfolio.

Okay. Really helpful. I appreciate it. And then on the expense side, the 2UniFi step-up, is that -- can we view that as kind of will now be in the run rate? Do you see a leg up higher again in coming quarters? Or just trying to get a little more color on the expense build, if any, regarding that piece before we get kind of the revenue potential visibility in the fourth quarter call.

Yes, on the topic of 2U 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.

I guess, Nicole, if we were to zoom out a little bit and think about '26 overall expenses. I don't want to front run as you pull budgets. But trying to think about overall with 2UniFi included, I know you've had some actions to reduce costs as well, I don't know if you could speak to overall growth of expenses expected in '26 or just maybe frame up the push and pull of what -- from a jump-off point of what you kind of framed up of, call it, $65 million core in fourth quarter.

Jeff, this is Tim. We're in the middle of some pretty interesting partnership discussions as it relates to 2UniFi right now. And we're really not in a position to speak in more detail to what might happen there in '26. We will maintain our commitment, as Nicole mentioned earlier, to address 2UniFi one way or the other in our fourth quarter earnings call. I would tell you, even with the step-up in -- if everything was status quo, even with the step-up in amortization, depreciation next year on 2UniFi, we will work to keep those expenses relatively flat. But that's assuming status quo. And at this point, we just can't speak any more detail on 2U.

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

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

Thanks, Kelly. This is Tim. I'll begin and then turn it to Aldis. I would tell you that the third quarter reduction volume was not driven by directive paydowns. We really think we've moved through addressing any risk in the portfolio that we felt we needed to address given the macroeconomic environment. What we've seen in the third quarter was largely heavy volume of payoffs as temporary or construction funding was going to perm with very attractive perm financing by alternative lenders. And quite frankly, we have seen private credit continue to step into the market, lending money on credit terms and at pricing that -- I've done this for, call it, 4 decades and I just don't understand what they're doing because we've just simply seen price and credit term competition from private credit that we're not going to compete with. So I'll turn it to Aldis to talk about how we believe we're positioned to overcome that because we are feeling very good about our pipeline and where we now stand with our, in particular, CRE portfolio.

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, just 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 fourth quarter.

Got it. Got it. That's helpful. And then just on the expenses, you announced the cost save plan last July. Wondering, did we get the full benefit of that this quarter and -- one? And then two, I apologize, [ guys ], if I missed it but how much 2UniFi expenses were in Q3 as well as what's baked into that $64 million to $66 million for Q4?

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 was 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.

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

Yes. We -- 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.

Got it. That's helpful. Last question for me. You guys announced a really exciting acquisition last month and it's on track to close next quarter. Wondering if you found the pace of discussions -- clearly, you're in the market given your announcement. So wondering if you could provide us, Tim, with kind of if you've seen any flurry of inbounds on the back of that announcement?

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.

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

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?

I applaud you asked -- for asking the question and I'll simply say again, we'll be providing all of that detail on our fourth quarter earnings call. I think I would also -- and I mentioned this earlier, repeat that we're in the -- in -- we're literally in the middle of a very important partnership discussion that we believe could have a powerful impact on the way 2UniFi moves forward and it's just inappropriate to be talking about 2UniFi anymore this morning.

Understood. I appreciate. Yes, I had to give it a shot there.

And I applaud that.

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?

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.

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?

Yes, Andrew, this is Aldis. So as you mentioned, we did buy $8 million or so in capital. We still have $35 million, $36 million authorization left. We'll be opportunistic with it along the -- in sort of -- in light of the discussions that we're having with potential M&A targets as well. But also be remiss if I didn't mention the 12% tangible book value growth this quarter that we built on top of that $8 million buyback. So we feel very good about our capital build over the last 12 months, very strong excess capital levels and we are looking at potential strategic options there.

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

I won't ask about 2UniFi. Wanted to go back just to the payoffs. I know we've kind of beat that to death here a little bit, too. But just wanted to make sure, it sounds like you're expecting better trends in the fourth quarter, private credit aside. Does the shape of the curve and the longer end coming in here, how does that impact maybe the commercial real estate portfolio? And do you have any line of sight into CRE book staying? Or what's -- any, just any thoughts on the yield curve from here relative to that portfolio?

Not at this moment. I don't think we've seen -- I'll say, I have not heard from our bankers that we've seen a paydown or prepay, so to say, based on the refinancing opportunities and lower yields. Now that's not to say that, that doesn't comp through at some time. But to date, shape of the yield curve has not impacted our paydown activity.

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?

We lost you at the end. You said any thoughts related to what?

Oh, I'm sorry. Any thoughts related to wealth, treasury management, trust, those opportunities for the pro forma franchise?

Well, look, first and foremost, what I'm excited about is the caliber of leadership and the quality of the new teammates coming in from Vista Bancshares. I think they've done a remarkable job taking market share in an important market like Dallas, Texas. And I don't have any reason to expect that to do anything but other than grow. I think the combination of these teams is going to make us incredibly strong and we're going to be leveraging key talent out of Vista across our entire organization. We remain committed to taking best practices, whether they come from NBH or Vista and running with those best practices. And we are going to be delivering, frankly, a much broader suite of treasury management capabilities into Texas, into Vista with NBH's arsenal of treasury capabilities. We're super excited about what we can do in the trust and wealth management arena. As a practical matter, Vista had been outsourcing that to a third party. Given what we're able to do with our Wyoming-based trust business, in particular and bringing those opportunities to clients in the state of Texas, just as we're doing around the rest of the franchise, I think, can be monumental. I mean I am genuinely that excited about it. I continue to say that what we're able to do in Wyoming for clients who are really concerned about privacy, that are concerned about controlling their trust, et cetera, is unfortunately one of the better kept secrets. But as we work to get that message out, I think we're going to continue to see exceptional growth there. Now was there one other? I hit treasury, I hit trust, wealth management. And really, I'll say with Vista, they've had -- they've built a solid private banking business and again, have been outsourcing that trust and wealth management piece. And so for the opportunity to bring that in-house is exciting. And Aldis, I'd ask you to comment.

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 fourth quarter already picking up those opportunities. So that work is underway and those synergies should be hopefully start showing their benefits here in fourth quarter.

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

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.

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

Maybe that's indicative of our thoughts.

Yes. But that's the answer.

But in terms of other sectors that I just think we have to continue to be watching closely. In the ag space, it's commodity row crops and the vulnerability there. And it's, again, a space we have limited exposure to but I mean, [ cattle ] operations are probably at some of the best performance levels in history. On the other hand, commodity exposure, that would be a tough place to be exposed to. We've talked about it before but another space that continues to just face tragic headwinds is transportation. And we worked aggressively to reduce the exposure that we were concerned about there and think that, that's a -- forgive the pun but a long road back for those truckers. So those would be a couple of areas that we -- I guess, if we were on the investor side, we would be keeping an eye on.

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

Thank you, 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.

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.