National Bank Holdings Corporation

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. At this time, all participants are in a listen-only mode. 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, non-interest income, margins allowance, taxes, and non-interest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risk 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 provide 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 Holding's first quarter results. I'm joined by our President, Aldous Burkens, as well as our Chief Financial Officer, Nicole Van Denneville. We delivered earnings of 63 cents per diluted share during the first quarter, which was negatively impacted by a loan that involved 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 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 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 $24.2 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 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-provisioned 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 two 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 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 accreted 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 predict fully taxable equivalent net interest margin to be in the mid 3 nines. Turning to deposits, spot deposit balances grew $186 million during the quarter and benefited from seasonal tax inflows, including the Canberra platform deposits. Cost of deposits improved nine basis points during the first quarter to 2.03%. Turning to credit qualities. 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 12 months. First quarter net car drops 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 $10.2 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 CISO modeling approach, our modeling weights a downside scenario in addition to the Moody's baseline scenarios. The forecast underlying the economic scenarios remained largely unchanged during the first quarter of 2025. Total non-interest 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 non-interest income to be in the range of $72 to $77 million. We remain committed to disciplined expense management in all environments. non-interest 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 two unified development remains on track, and we are preparing to provide revenue guidance with 2025 year-end results. Two unified 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 to $278 million. We maintained strong levels of liquidity and continued 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 Aldo.

All right. Well, thank you, Nicole, and good morning. I will briefly cover the balance sheet trends and even updates on the business environment. As Nicole has shared, we had a slower start of the year than expected. The first quarter's loan funding totaled $256 million with an average fund Increased levels of volatility due to concerns about inflation, higher interest rates, supply chain stress, and tariffs cause a large number of businesses to pause their activity. Small businesses in our market have become more cautious in their plans for CapEx investments and M&A. Having said that, we still have an upside in our geography to take market share and improve our pipeline's pull-through, and we aim to achieve our full-year long-growth guidance. On the credit front, of course, we have disappointed details as we can at this time. However, looking at the rest of the loan portfolio, we've seen grooving trends with NPAs down seven basis points from a year ago and one basis point on the lean quarter basis. 90-day private due loans are down to just a 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 balance is due by $186 million during the quarter. and in the process, the lower dollar 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. And like the loan pipeline, we continue to see productive venture engagement, which is the resulting inclined 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 paved the path to delivering our total expenses at the low end of our full-year guidance. And with that, I'll turn it back to you.

Thanks, Aldous. 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. If you'd like to ask a question, please signal by calling Star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's Star 1 to ask a question. And we'll take our first question from the line of Jeff Ramos with DA Davidson. Please go ahead.

Thanks. Good morning. Good morning. Question on the... the fraud item. I know that Tim said he shared what you could. I guess as that goes into the investigation stage, you know, is there any comment on expectations for recovery at this point?

Yeah, 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 in any further.

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

Yes, it's one centered in one client. There are no systemic issues here. Thank you. I'll be very glad to clarify that point.

Gotcha. And I guess as it relates to maybe moving to the margin, Was there, you know, the reported, I guess, 393, was that impacted at all with, I mean, I don't know if that's just removed from running assets or was there interest loss that impacted, I think we got your guide of the mid-390 from here, which is just a little higher, but I guess just checking on that piece, was that, did that impact the margins at all in the quarter?

If you did, gladly, I'd say at most those two data points, because obviously, And it kind of surprised us in the first quarter, and there was some interest accruals that had to be reversed along the way. So, and I'd say that's about two basic points of margin impact. Thank you. And I would say the other point, the margin, that you did do the investment security purchases, and then when we reinvested the stuff to be sold right 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 next impact as well in margin calculation. Okay. Thank you.

Hey, 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 loans, that we fully addressed it in the quarter. To be very clear, there's no additional downside exposure to this client or former client.

Got it. Thanks. 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 after 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?

Yeah, there's nothing specific, as Dan mentioned, back to the marks. There's nothing systemic or industry-specific. It was several others that we charged off, and most of them are actually reserved for us to do our TCOs. allowance model, and so is 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 our credit trends, NPA is down, NPL is down, we find ourselves in an improving credit environment up from already, I would say, better than all the industry averages on NPAs, at least. Okay.

Thanks. I'll get back. Thank you, Jeff.

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

Please go ahead and line us up a little bit.

Hey, good morning, guys. This is Charlie on for Kelly. Thanks for the question. 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 are you thinking about the portfolio from that perspective? Thank you.

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 tears might be, where they might land, makes it 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, you know, the good news is we're still seeing, they're still seeing So, you know, 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 tariffs, in fact, 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 beat that from here? Just, like, some detail or color there would be great.

All right.

Again, I think what we realize is the markets we operate continuously outperform national averages. So we feel like we have a bit of a sterile in our lens from that perspective. It is a, the uncertainty, what Tim is mentioning, is maybe the component that will continue to, will watch very carefully, and our clients are watching, our prospects are watching carefully. To that point, really, if you look at phase nine of the earnings release and look at 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 them on that table.

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 repurchased shares pretty consistently. And with the volatility in prices at these levels, just 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 for all that.

We'll take our next question from the line of Andrew to our host, Stephen. Please go ahead. Your line is now open.

Hey, good morning. Good morning.

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

Yeah, I'll take that. We do believe we operate with a generally conservative posture on credit. And, you know, we tend to adjust that posture based on different emerging risks or potential emerging risks in the marketplace. And certainly, as Aldis suggested, you know, 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 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, you know, 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 that. You bet. If I could just ask on the expenses, I mean, obviously, you guys are tracking very well with all the specific guidance. 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. Good morning, Andrew. The dollar amount for the payroll tax credit that we realized in the first quarter was $2 million.

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

Well, you know, candidly, as we sit here this morning – The best acquisition I could make would be if I were on shares. So that tells you a little bit about where our heads are at in terms of priorities. In terms of market acquisition, I would tell you that it has been a difficult market. I think, you know, there are a lot of institutions and leaders of institutions that are rightfully in a wait-and-see mode. And... You know, I understand that. Of course, we can't announce a broad hit like we took this first quarter and see the impact that it's had on our stock and be in as great a position to make acquisitions. So, you know, we just have to prove to the market that this was, in fact, an anomaly, going back to Jeff's question. And, you know, I'll add on that my focus is on delivering stock. our all-in targeted income growth for the year. We will, if that means exceeding the low end, you know, or doing better than the low end on expenses that we've got, 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, you know, and look, we should point, you know, we built capital, obviously, in the quarter. It's not as though we're not building capital, and again, we continue to believe that optionality is incredibly critical in this business. I'll also say we're building capital while also investing, continuing to invest into Unify, and no one has asked, but You know, 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 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 time. I'll step back. Thanks. Yeah, thanks for the question.

We'll take our next question from the line of Andrew Leaf with Piper Hamer. Please go ahead. The line is open.

Thanks. Good morning, everyone. You know, just some follow-ups on expenses in the fee income guide. So adding back in that the payroll tax benefit, I mean, you're tracking well below that, those low end of that range. I just wish we see expenses increase over the course of this year? Is it more investments to unify? Is it more on compensation costs? 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 million payroll tax benefit for this quarter, this quarter's expenses are very much in line with where we were last 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 two unifies. So that has a few different components. One, as Tim mentioned, once we go live with two unifies, 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 G-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 got it.

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 first quarter once season five goes by. Is that the right way to think about it?

Yes, it is.

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

Yeah, you got it. So that's probably the most obvious one as you look at the other interesting line item that's unusually low for us this quarter. And I'd say around about a couple million dollars there between at least those two line items. Did we just think even this lower loan production did not materialize as much on SBA and CLOPS? But we do expect it did for that. But that might not be of a problem.

And then obviously, Z and 4, their charges would lower and lower score as we have to. 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 Rabatton with Hope Group. Please go ahead. Your line is now open.

Hey, good morning, everyone. Wanting to start off, you know, 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, do you just sit, or do you get more competitive with the competition to drive some longer?

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'd simply rather sit on the sidelines, which I don't think we have to do altogether with targeted marketing. But, you know, 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 necessary. 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 if the client's, 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 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 the credit structure.

And I think Tim covered it really well. I mean, that's actually proof of that is 7.3%. And in the first quarter, in long origination, we feel very good about that. It's very accretive to our margin. And that's what the law book says. It's really a 6.4%. So, pricing really is, back in the 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, Connor. And then on the deposit side, you know, I noticed average balances were kind of flat at the end of period savings and Money market is 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, you know, if that was excess liquidity or you think that's core growth, you know, just any thoughts on those balances and deposits from here? Sure.

Yeah, so there's several things to go through that. One is some dimension is a little bit of extra security of the clients that they're not necessarily deployed in their business growth. We also saw a little bit of a tax seasonality that's primarily in a camber flow that helps the spot balances later in the quarter. So those are somewhat sticking around for a fair amount of time as those monies are spent. So, again, the end of the quarter is $90. ish loan deposit ratio. We like that. See a lot of upside in engagement back to the relationship approach that he takes with every client. We view and demand operating accounts from all of our relationships. So, therefore, we feel like we can grow their deposit balances along the line, but it won't grow.

Okay. And then maybe this last one for me, the securities purchases during the quarter. I'm just curious what you thought and if you might be interested to buy more. You know, any thoughts on that portfolio and deals from here?

Yeah. 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 purchased those right around a 5% yield, which improved our net interest income because what we sold was about a 2.65%. Aldous, anything you would add?

No, I think the guidance on that was that we will maintain cash in the investment portfolio. That's about 15% of the total assets and be able to deliver that this year. And as a reminder, the investment portfolio is liquidity portfolio. So back to the whole comment, it's highly liquid, short duration, conservative investments in the just enough amount of money to be used for equity purposes to be stored on balance sheets. And that's how we came up with that 15-inch percent. Okay.

Great. Appreciate all the color.

We'll take our next question from the line on Jeffrey with V.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 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 non-interest expense the rest of the year. And I guess that comes from the back out to the payroll benefit as well as a step up into Unified, I guess, to get to that low end. Maybe... Just one question I have is checking the T-unify. Yeah, go ahead.

I have to compliment you. Your math is always very good. I appreciate it, Tim.

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

All right. Well, that's rare. Let's see. I'm just on the T-unify 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?

Yeah, it's consistent. To clarify, it will be released with fourth quarter results and guidance for next year. Okay. And our expectation is to be Our expectation, in fact, is to begin to build toward a multi-year outlook for GFI.

That's great. Thanks. Appreciate it. You bet. You bet.

Thank you. 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.