National Bank Holdings Corporation (NBHC) Earnings Call Transcript

Good morning, everyone, and welcome to the National Bank Holdings Corporation [ 2025 ] Fourth Quarter Earnings Call. My name is Marco, and I'll be your conference 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, Margo, 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.

Well, thank you, Emily. Good morning, and thank you for joining us as we discuss National Bank Holdings Second Quarter 2026 financial performance. I'm joined by our President, Aldis Birkans; our Chief Financial Officer, Nicole Ben Denebill; and John Steinmetz, our Executive Vice Chair and Executive Managing Director of Strategic Initiatives. Our team delivered solid second quarter results with record loan production and 10% year-to-date loan growth. Strong credit metrics reflect our intense focus on prudent growth. . Our commitment to developing full banking relationships with our clients continues to translate into operating with a low cost and diversified deposit franchise. Expenses continue to be well managed, and we expect to meet or exceed savings resulting from the Vista integration. Before I turn the call over to Nicole, I want to share how pleased I am with the revenue lift we're seeing from the Vista acquisition. Our bankers are excelling at delivering quality results for our shareholders. I also want to recognize our countless teammates that have positioned our company to seamlessly integrate the Vista acquisition with all conversions targeted to be complete by quarter end. Now on that note, I'll turn the call over to Nicole. Nicole?

Thank you, Tim, and good morning. This morning, I'll walk through a second quarter that demonstrated strong operating momentum across the bank, and I'll provide our outlook for the second half of the year. As a reminder, our guidance does not include any future interest rate policy changes by the Fed. For the second quarter, on an adjusted basis, we reported net income of $35.3 million or $0.78 of earnings per diluted share. Annualized, this is 33% higher than the prior quarter. The second quarter's adjusted return on average tangible assets increased 6 basis points to 1.3%, and the adjusted return on average tangible equity increased 92 basis points to 12.7%. Year-to-date, we grew our fully taxable equivalent pre-provision net revenue by 23% over the same period last year, generated a record level of loan production and maintained a top quartile net interest margin. Turning to the balance sheet. Client activity was strong during the quarter, and our pipelines continue to build as we move into the back half of the year. Our teams generated record quarterly loan originations of $927 million, driving year-to-date annualized loan growth of 10%. With that momentum carrying into the third quarter, we expect full year loan portfolio growth of 10%. Fully taxable equivalent net interest income for the quarter totaled $111.5 million, an increase of 25% compared to the second quarter of last year. Net interest margin during the second quarter was a strong 3.94% and remains in the top quartile of our peers. For the remainder of the year, we expect a net interest margin near 4%. We demonstrated success in gaining full client relationships, which drove average deposit balance growth of 2.3% annualized. Deposit costs improved 1 basis point during the quarter and remained a low 1.93%, with a total cost of funds of 2.01%. The loan-to-deposit ratio ended the quarter at 94.1%. Turning to asset quality. Credit quality remains strong. We recorded $1.5 million of provision expense, primarily to support the loan growth during the quarter. Second quarter net charge-offs were 27 basis points annualized. Nonperforming assets remained a low 35 basis points, and the allowance coverage ratio totaled 1.13%. Our allowance coverage on nonperforming loans improved from 2x to 3x of coverage over the past year, underscoring our positive credit quality trends. Additionally, we hold $19.6 million of marks against our acquired loan portfolio, which provides an additional 20 basis points of loan loss coverage if applied across the entire loan book. Fee income was another area of positive momentum this quarter, increasing 40% annualized over the linked quarter. Noninterest income totaled $19.8 million and all this will provide more detail on that shortly. We expect full year fee income to be within our previously guided range of $75 million to $80 million. Noninterest expense totaled $95 million for the quarter including $11.2 million of acquisition and restructuring expenses. Excluding these onetime items, noninterest expense was $83.7 million, up from the linked quarter due to merit increases and one additional day in the second quarter. As expected, the majority of expense synergies from the Vista acquisition will come online following system integration in the third quarter. As previously guided, we continue to project total noninterest expense for the full year to be in the range of $320 million to $330 million. Our capital levels remain well in excess of well-capitalized regulatory thresholds. Common Equity Tier 1 ratio ended the quarter at 12.3%, and our total capital ratio was 15.4%. Tangible book value per share grew to $26.23 and with earnings more than covering the quarterly dividend and $11 million of share repurchases during the quarter. Importantly, we believe we are on track to deliver earnings in excess of $1 per share in the fourth quarter of 2026. With that, I will turn the call over to Aldis.

All right. Well, thank you, Nicole, and good morning. I'll start with the highlights of the quarter, loan production. As Nicole mentioned, we funded a record $927 million during the quarter. To put that in perspective, year-to-date production now stands at $1.7 billion. which already exceeds our total fundings for all of 2025. That's a meaningful marker of how much of the growth engine has accelerated and includes us nicely on track to hit our full year 10% loan growth guidance. . What I'm most encouraged by is how broad-based is production was. It was not a one team or one region story. We saw contributions across most asset classes and most of our geographies. The granularity matters of the whole franchise is pulling in the same direction. Several of our teams are truly just gaining momentum, and we are heading into the back half of the year with healthy pipelines across the board. It's also worth highlighting that our line utilizations continue to move up towards historical averages as our clients are becoming increasingly comfortable with the economic outlook. Turning to credit. We continue to see overall credit trends improved with both classified and criticized loans being down on the link quarter and on a year-over-year basis. Our past due loans also were down. both NPAs and NPLs remained at low levels. Simply both credit remains in a very good shape. Fee income is another strong point. Noninterest income grew 10% on a linked quarter basis or 40% annualized. The fee income increase was driven by strong growth in service charges, card income and treasury management activity. In addition, we continue to benefit from a more diversified fee base with solid contributions from Trust and belt amber and swap income, all adding to the RobusGro. Finally, turning to the operational side of the Vista Bank acquisition integration. We remain firmly on plan. And John will give us more perspective on that. John?

Thank you, Aldis, and good morning, everyone. When we spoke last quarter, this quarter was about bringing 2 strong seasoned companies together. This quarter, the story is about what we are accomplishing now that we are 1 team. Much of the heavy integration work that defined our first few months together is now behind us and our core conversion is on track to occur in the third quarter. That means our teams are now spending more time doing what they love taking care of our clients and originating record loan production. The people-first culture we described at close is no longer something we are building towards. It's simply how we operate. The culture has become the pinnacle of our recruiting success. Since January 7, when the merger closed, we've added numerous seasoned banking professionals throughout our entire franchise. Bankers are developing new client relationships, broadening the reach and increasing market share within the communities that we have the privilege to serve. I've always said and truly believe the best bankers bank the best clients, and we are watching that unfold. Looking to the back half of the year, our focus shifts from integrating to compounding shareholder value, introducing clients to products and services such as treasury management, trust and wealth, residential mortgage and other sophisticated products leverages the strength of National Bank Holdings Corporation. Each of these lets us go deeper with the clients, and that is where durable, profitable and long-term growth comes from. We will keep running this company for the long run, disciplined on credit, thoughtful on capital and relentless on service. In conclusion, I would like to take a moment to thank our most important asset, our people. you, they are the reason I'm confident about the ability to exceed our client and shareholders' expectations. We thank you for your trust as the powerful combination we thought was possible becomes a reality and as demonstrated by the quarter's performance, and that is why I know the best is yet to come. With that, Tim, I'll turn it back to you.

Thank you, John. Well, as you've heard, we're experiencing strong momentum across our core banking franchise. We expect this momentum to build in our favor. And as Nicole shared, we believe we're on track to realize $1 plus of EPS in the fourth quarter of this year. On other fronts, while 2 unifi revenue growth has been slow and coming, investments in the business remain well managed and partnership potential is very solid. We continue to grow our tangible capital and ended the quarter with a common equity Tier 1 ratio of 12.3%. Our balance sheet supports meaningful optionality. We will continue to invest in talent. We will opportunistically buy back shares, and we'll reconsider M&A once we complete the Vista integration. Make no mistake, we are in great markets, and our team is well positioned to deliver meaningful value for our shareholders. And on that note, let's open up this call for questions.

[Operator Instructions] We'll take our first question from Jeffrey Rulis with D.A. Davidson. .

Wanted to get into the loan growth, the funding side is pretty impressive. Just wanted to ask about the net level and what maybe is kind of a headwind to that as we're assuming some payoffs or just if you could describe kind of the undertone of why the net remains at maybe 10% admittedly strong fundings.

Yes, Jeff, this is Aldis. I'll take that. As you said, the loan growth or the loan originations were extremely strong. We're very proud of that, what teams accomplished this school. What the little bit of headwind that came through was a little higher acquired loan churn, so to say, again, that's not unusual. If you look in the first quarter, it was a little bit lower. So on average year-to-date basis. It actually is where we were expecting and therefore, year-to-date loan growth is 10% where we had been guiding. So I do think that that's going to even out here going in the second half of the year. But again, $1.7 billion loan production for the first half of the year is very impressive, very happy with that.

Jeff, I would add the reality is when you see some of the longer-term debt that's coming in for renewal, you are seeing competition against those higher-yielding loans we have discipline around total client profitability, and there's a point where we are willing to let business go elsewhere if we don't believe it's going to achieve our desired levels of profitability. That clearly also that dynamic is putting -- has put a little interim pressure on the margin. But on the whole, we still have confidence when we look at where margin is going to hold for the year. given what we understand about what's renewing in our loan portfolio and what that looks like the remainder of the year, we still feel very confident about a very strong March and holding in. .

Yes. Yes, it sounds like -- well, I guess, just to understand that fully. It sounds like maybe Civista attrition is what is against some of the record fundings -- am I hearing that right?

Well, it's a common mention -- so Vista was a contributor. But again, if I look at the first half of the year, for first 6 months, it's exactly where we expect it to be. But I think it's not to be lost the point that Tim is making that we did see and that kind of goes down back to kind of the NIM discussion on the loan yields. If you see the loan yields came in a little bit, that is due to the higher loans churning and that's both on NBH and business side.

But I want to be clear. Our bankers have done a phenomenal job of retaining clients through the Vista acquisition. So that isn't some unique driver of this. I'm going to bring you back to what I said before, where you see attrition of business. I would say, frankly, it's more in this current environment, price sensitivity than anything else. And we've had discipline through the years around relationship pricing. We don't look at just the credit. We can be more flexible where we have, for example, robust depository treasury management relationships. But what we're not going to do is pursue business that's either too high in risk are not generating adequate profitability. So I can't say enough about the job our bankers have done to retain relationships through this integration and not only that, but focus on growing beyond it.

If I could just hop over to the expense side. I got that full year guide. I guess maybe could we, I guess, a normalized quarterly expense run rate, maybe in the second half, it sounds like the conversion and maybe even a better question is, is the Q4 run rate of where you exit the year as we try to pull out those merger expenses and see where you land. .

Yes. Jeff, this is Nicole. I'll be happy to give some color there. So I will say Q2's expenses came in, in line with our expectation. As I mentioned in Q1, we have made some investments in new banker talent. Q2, we also have merit increases coming online, one additional day in the quarter. We are on track to meet our full year expense guide of $320 million to $330 million. we will, to your point, we will see the benefit of the expense synergies from the acquisition. Those will come fully online in the fourth quarter. That will be our first kind of clean quarter. And I do think it is reasonable to expect in the fourth quarter that expenses would be below $80 million.

Got it. That's helpful. And maybe while have. The margin average in June, do you have that figure?

Yes, I do. I do. And I'll be happy, Jeff, to give you more color on margin broadly. I'll start by saying we're proud of maintaining a top quartile margin. June's margin, we exited the month with a June month end margin of right at 4%. And that gives us confidence guiding forward to a year 4% margin. Breaking down Q2's margin in a little bit in some of its pieces. I will say, positive for Q2 margin, our cost of deposits improved 1 basis point. We did have a 3 basis point increase in our cost of funds, and that was entirely driven by the Fed debt issuance that we did at the end of the first quarter. So that said, that issuance came fully online in the second quarter, if you strip out that impact, Q2 cost of funds was flat with the first quarter, which we are proud of, given the funding pressures in the industry that we were able to hold our cost of funds flat. Additionally, average earning asset balances increased 9% over the first quarter. Average loan balances increased 15% over the first quarter where we did experience margin compression was in our loan yields for the second quarter, which Tim and all this have both mentioned. A couple of impacts there. So we are impacted by some churn of loans on the existing book where you have loans in the high 6s. -- renewing. We did have new loan origination yields for Q2 right about 6.4%, 6.5%. At those levels, new loan originations are still accretive to margin. So while that -- while those loan yields came in a little bit, we are maintaining our spreads and still picking up margin accretion from new loan activity -- and in the second quarter, loan yields were also impacted by some volatility in purchase accounting accretion volume, and that will vary quarter-to-quarter, give or take a few basis points.

And next, we'll go to Kelly Motta with KBW. .

To appreciate the -- I think you reiterated both your fee and expense guidance -- just wondering if you could provide an update on the contribution of Unifi. I think previously, you said that was about $22 million of expenses and $2 million to $4 million in the fee run rate, if that's still embedded in that outlook? And any updated thoughts on kind of where progress on that stand?

Yes. Kelly, thanks for the question. Look, our revenue performance on to Unifi has been underwhelming to date. There is good news there. we've seen in the second quarter applications, full applications growing dramatically, applications of 800% over the first quarter. but conversions are not dialed in yet. And that's where you get the revenue. And as a practical matter, what we're seeing is applications that are not still hitting our credit risk profile. And we're not going to compromise on that. It speaks to our need to do more targeted marketing to think more about attracting the right kind of applications because at this point, we're seeing dramatic increase in applications coming in from pure startup businesses, which as a commercial bank, we're not equipped to bank. And frankly, the other is just straight up credit quality issues. And so it speaks to the need, again, to continue to refine our application, target marketing, and we're doing just that. There is some positive news while the dollars are small, we're seeing deposit growth in the business. The beauty of that is these are granular small business deposit accounts. We love the granularity. It's just building on a very small base and to see that grow. So Nicole, if you want to speak to how we're adjusting and thinking about filling gaps driven by -- we didn't attribute a lot of revenue to unify this year. Our intention is to fill those gaps, and you may want to speak to how we're going to address that.

Yes. So Kelly, your numbers are right on with what we had previously guided. So $2 million to $4 million of revenue from Unify. We do feel confident in our overall fee income guide regardless of where the 2 UniFi revenue comes in, we're seeing some nice lift in other areas of our diversified fee revenue. And then on the expense side, your number is accurate, right, $20 million to $22 million of unifi expenses, which is flat to last year even with bringing on a full year of amortization of the capitalized asset. I will say from a 2 unified expense standpoint, expenses are well managed, and we are on track to meet that guide.

Okay. All right. Got it. That's helpful. Then I'd like to pivot just overall to funding. I think loan growth has been super strong at NBH and definitely a highlight. It looks like deposit balances at least on a spot basis were down slightly and utilized some greater amount of borrowings, just Wondering how you guys are thinking about the loan-to-deposit ratio and the funding of that kind of 10% loan growth going forward?

Yes, Gale, this is Aldis. I'll take that. In terms of -- again, we usually look at the average deposit balances to -- because that kind of measures the overall strength of the balance sheet and takes out the day-to-day volatility at the quarter ends. For example, the tax seasonality in the first quarter, we were benefiting some from that. So adjusting for that really actually transaction deposits were flat even on spot basis and grew $115 million on the average basis. So there is plenty of momentum. It is, as always, for us, focus on relationship banking our bankers know that it is full balance sheet approach to how we go to market and we expect to be able to support our growth with core deposits.

Yes. I would add, we also historically have gone through cycles where when you see a slight step-up in more commercial real estate production, you tend to see less deposit growth. That's why we are hyper focused over time on growing commercial banking relationships in the C&I space. That's where you really pick up the full treasury management depository relationships that have made this company so strong over the years. And we certainly make no apologies for the granularity and the breadth of our deposit base. And I think the fact that we actually saw cost on that deposit book come down a basis point speaks to the strength of those relationship deposits. And make no mistake, if we had wanted to grow deposits more and play the pricing game, we could have certainly done that.

Got it. That's helpful. Maybe last piece for Nicole, probably just to understand the dynamics of the margin. It seems like some of the variance between Q2 and Q1 was just some higher loan fees in Q1 maybe accretion. Do you have those numbers handy just so we can get a better sense of underlying trends because clearly at a 3.94 margin, still 1 of the better ones in the industry, but I think some of us were looking for flattish because of those dynamics. .

Yes, Kelly, thanks for the question. I would say, as I mentioned, we will continue to see some volatility just related to the pattern of how that mark accretion comes in just driven by payoffs, pay downs and the volume of those and the timing that they hit. I wouldn't expect that to be more than a couple of basis points of margin volatility over time. And I think that's the piece that you're seeing from Q1 to Q2.

And we'll next go to Matthew Clark with Piper Sandler.

Nicole, can you just along those lines of that last question. Can you just give us the accretion that was part of net interest income this quarter. I think it was $1.4 million last quarter.

Yes. It was $1.4 million last quarter and it was about $1 million this quarter. Related I guess I should clarify, related to the Vista acquisition, we do still have accretion, some accretion impacts from prior acquisitions that can drive some of over time as well. .

Okay. And then on loan yields, I understand why they were down this quarter, but what's your outlook on loan yields going forward? .

Yes. We think that loan yields have roughly normalized. So we believe that they've settled in where there are going to be -- like I mentioned, new loan origination yields in Q2, right about 6.4%, 6.5%. And we feel like that, that's at a normalized level.

I think it's such an important question because we do spend a lot of time looking at our book remaining renewals throughout the year, and that's where you become somewhat vulnerable, and we feel like at this point, renewals are going to be well managed, and that's what gives us the confidence that we believe we can hold our position here through the remainder of the year. .

Okay. And then just on the overall margin, it sounds like there was some nice lift at the end of the quarter. I guess what drove that margin up to 4% at the end of the quarter relative to the 2Q average?

Yes. No, as Nicole mentioned, that around 4% June margin was what we would call actually clean. So the volatility of that mark impact that we talked about was realized earlier in the quarter, previous months, so to say. So June actually felt very clean. That's why we were very comfortable sharing it. .