National Bank Holdings Corporation

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2025 Second Quarter Earnings Call. My name is Rachel, and I will be your conference operator for today. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded for replay purposes. 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 risks, uncertainties, and other factors, which are disclosed in more detail later and 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.

Thanks, Rachel. Good morning, and thank you for joining us as we discuss National Bank Holdings' second quarter results. I'm joined by our president, Aldous Burkhans, as well as our chief financial officer, Nicole Van Denneville. We delivered earnings of 88 cents during the second quarter with a 14.2% return on tangible equity and a 1.5% return on assets. We delivered a strong net interest margin of $3.95, resulting from deposit and loan pricing disciplines. During the quarter, our teams produced $323 million of loan fundings while also remaining focused on reducing exposure within certain higher-risk industries, which Nicole and all of us will speak to later. We believe these actions will result in more responsible profits in the future. During the quarter, we also took action to reduce our core bank annualized personnel expense run rate by a full 10%. Finally, we are pleased to share that we successfully launched release one of 2Unify in the Apple App Store and expect to go live on Android July 30th. Activity has been solid, particularly in light of the fact that we have not even launched our marketing campaigns. Further, user feedback has been quite positive. And on that note, I'll turn the call over to Nicole. Nicole?

Thank you, Tim, and good morning. During today's call, I will cover the financial results for the second quarter, as well as touch on our guidance for the rest of the year, which does not include any future interest rate policy changes by the Fed. For the second quarter, we reported net income of $34 million, or 88 cents, of earnings per diluted share. This resulted in a strong return on average tangible assets of 1.5%, in return on average tangible common equity of 14.2%. We grew our fully taxable equivalent pre-provision net revenue by 19.9% over the second quarter last year, maintained a strong net interest margin, and built additional excess capital. As Tim shared, our teams generated $323 million of loan funding during the second quarter. Elevated loan paydowns coupled with strategic portfolio reductions within targeted industries led to a decline in loan balances during the quarter. Our bankers remain committed to growing client relationships. We continue to build our pipelines and are projecting annualized mid-single-digit loan growth for the second half of the year. Fully taxable equivalent net interest margin expanded two basis points during the quarter to 3.95%. Fully taxable equivalent net interest income increased $0.7 million during the quarter to $89.3 million and grew by 4.7% compared to the second quarter of last year. The year-over-year increase in net interest income is a direct result of our disciplined loan and deposit pricing over the last 12 months, which has resulted in solid margin expansion. Second quarter's new loan originations came on at a weighted average yield of 7.4%. For the remainder of 2025, we project fully taxable equivalent net interest margins to remain in the mid 3.9. And as I mentioned earlier, this does not incorporate any future interest rate decisions by the Fed. Turning to deposits. Seasonal tax outflows resulted in a decline in average deposit balances of $58.8 million during the quarter. Cost of deposits totaled 2.05%, and our total cost of funds was 2.09%. Turning to credit quality, non-performing loans decreased during the quarter to $33.3 million. Our non-performing loan ratio remains below peer averages of 45 basis points of total loans. Annualized net charge-offs for the quarter were just five basis points. The allowance to total loans ratio remained consistent at 1.2%. Additionally, we continue to hold $20 million of marks against our acquired loan portfolio, which adds an additional 26 basis points of loan loss coverage if applied across the entire loan portfolio. Non-interest income for the second quarter totaled $17.1 million, 11% higher than the first quarter and 22% higher than the second quarter of last year. For the second half of 2025, we project our total non-interest income to be in the range of $34 to $36 million. Non-interest expense totaled $62.9 million a $0.9 million increase over the first quarter as a result of $1.9 million of payroll tax credits, which lowered the first quarter's expenses. Excluding the payroll tax credits benefiting the first quarter, non-interest expense decreased $1 million on a linked quarter basis as a direct result of intentional efforts to lower our operating expenses. In light of the ongoing economic uncertainty, we took action during the second quarter and executed on an expense reduction plan. We incurred nominal restructuring expenses during the quarter and estimate the actions taken at the end of the second quarter will reduce our annual core bank personnel expense by approximately $15 million. As a result, we are lowering our projection for non-interest expense. We now project our non-interest expense for the second half of the year to be in the range of $126 to $128 million. As you have heard, we are pleased to have launched 2Unify last week. As a reminder, we are preparing to provide 2Unify revenue guidance with 2025 year-end results. For the second quarter, 2Unify expenses totaled $4.6 million. We project 2Unify expense for the second half of the year to be in the range of $16 to $17 million, increasing primarily as a result of amortization expense on the capitalized development asset now that 2Unify is live. With the expense reduction actions taken in the second quarter, we project to continue to grow quarterly pre-provision net revenue. even with the increase in the two unified expense expected in the second half of 2025. We maintain strong levels of liquidity and continue to build excess capital. We ended the quarter with a strong TCE ratio of 10.5%, Tier 1 leverage ratio of 11.2%, and a common equity Tier 1 ratio of 14.2%. Year-to-date, our tangible book value grew by 10.7% annualized to $26.64. With that, I will turn the call over to Alder.

All right. Well, thank you, Nicole, and good morning. As Tim and Nicole already mentioned, loan production activities started picking up in the second quarter with healthy loan fundings of $323 million, which was an increase of 26% over the first quarter's slower start. And while we still see some clients being somewhat cautious in this economic environment, our loan pipelines for the second half of the year are building nicely. We entered the third quarter with a good level of energy and optimism. As always, we have not and will not compromise on credit. Our bankers focus on full relationship banking and do not chase deals just to show growth. I think the best evidence of this is our loan pricing disciplines. with new loan rates coming on at a strong 7.4%. Our loan and deposit pricing discipline during the quarter allowed us to expand our net interest margin by two basis points to 3.95%. In terms of the overall loan portfolio, the decrease this quarter was primarily driven by declines in certain higher-risk asset classes. For a while, we have expressed concerns with the trucking industry, It's been a while since we have originated loans in this space. In this quarter, we saw an opportunity to decrease our trucking portfolio exposure, which now sits at just about $100 million, or just 1.5% of the total portfolio. Additionally, we decreased our exposures within the agricultural and within the commercial real estate sectors. In aggregate, these three asset classes ended up driving the portfolio decline this quarter. We continue to see solid credit metrics. There's just five basis points in the annualized net charge-offs, and NPA is continuing to research the recent downward trend with another $1.6 million decrease this quarter. The NPA ratio ended the quarter one basis point better than the first quarter at 0.45%. This quarter, we also saw nice growth in our fee income on both in-quarter basis and as compared to the prior year's second quarter. And while this quarter on the disposition of consolidated banking center buildings. We did see seasonal rebound in our bank card income, as well as an increase in SBA gain on sale income. As loan volumes continue to pick up for the second half a year, we project higher fee income related to SBA gain on sale, as well as derivative fees. Tim, with that, I'll turn it back to you.

Thank you, Aldous. Well, we had an active second quarter. We generated $323 million in new loan production. We successfully reduced loan exposure in targeted industries with higher risk profiles. We maintained pricing discipline, resulting in a 3.95% net interest margin. We took action to reduce our core bank's annualized personnel expense run rate by 10%. We successfully launched Release 1 of 2Unify, and we grew our tangible book value to $26.64 per share. On that note, Rachel, let's open up the call for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. And we will take our first question from Jeff Rulis with DA Davidson.

Thanks. Good morning. Thanks.

Hey, Jeff. Good morning.

On the loan side, again, sounds fairly cautious and just want to kind of check in on, you know, the amount of, you know, those higher risk trucking ads, CRE. Is that, I mean, given the guide of resuming towards a mid-single-digit pace. It sounds like the bulk of that is what you wanted to clean up is kind of done. I guess that's question one. And then two, just wanted to see if there's any management of growth tied to kind of the $10 billion asset mark, if that's still an area that may be keeping growth levels somewhat subdued.

Thanks. Yeah, I'll – I'll answer both together, if that's all right, Jeff, because to begin with the latter question, I would tell you that there's been no management at this point to stay under the $10 billion threshold. Again, we've been operating for years as though and we were regulated as though we were a 10 plus billion dollar bank. So that expense has been embedded in our run rate for years, no issue there. We've outlined what Durban would be, which is in the grand scheme of things, nominal. This growth matter is going to be reconciled in the second half of this year, because to answer your question, we've largely taken action against the bulk of the relationships and loans that we felt we need to. Now, are there others we're watching closely and with the right opportunity to take them down? Absolutely. But, you know, I'll also remind you that we operate well under all regulatory limits with our own house limits. And none of these areas we've talked about had even approached our house limits. This was just really an act of caution. and being proactive. And as I've said in my prepared remarks, I really believe it's the kind of action you have to take that translates into more productive results down the road.

I'll add to that in terms of the optimism on second half's growth. Pipeline is strong, as I mentioned, and I would actually characterize it probably the strongest we've seen in the last 12 months as we enter the third quarter. So there is activity and success a pipeline to grow our guided mid-single digits for second half, subject to what Tim mentioned. If there's other opportunities, we'll certainly jump on those.

Okay, I appreciate it.

Any questions, Jeff?

Yeah, no, that was great. I appreciate that. That was pretty detailed, so thank you. And if I hop to the margin, you know, got the – steady sort of guide from here. You know, from our prior discussions, it sounded like you had some pretty good opportunities, and based on those new loan yields, some pretty good reinvestment not only in loans but on securities, and that was pretty positive. I guess if I could just sort of frame up, you know, an environment that you see maybe margin expansion, what would have to occur to kind of, see it sort of break more towards 4% than steady?

Well, first I'll say that we are very proud of 395 margin. I think that puts us in very good company in terms of peer banks. But in terms of the outlook, I think what would really have to move or what would really move our margin in a positive way is is really DDA growth at the end of the day. That's math on that, bringing in zero-costing deposits and lending it out at 7.4%. It's obviously extremely marginal creative. So I think the deposit mix will drive the outlook for the margin.

Okay. Great. I'll step back. Thank you. Thanks, Jeff.

Thank you. We will take our next question from Kelly Mota with KBW.

Hi, this is Charlie. I'm for Kelly. Good morning.

Hello, Charlie.

It was exciting to see the T-Unify launch this month, the platform, and the partnership with NAV. Can you speak about how the launch went and how the market is receiving T-Unify and provide some color on the partnership and how it came about, and what benefits you think it can bring to the platform.

Yeah, I would compare our launch to the soft opening of a restaurant. We had done prior friends and family testing in a lockdown environment, so now to be in a position where anyone can access the app and begin the process, what you'll find is You get to the point to sign up unless you're a small business or medium-sized business and have an EIN. It's going to be, you know, you won't be able to go too far. But what I would tell you is that all of our security and fraud detection systems have worked beautifully. We've certainly seen, as what happens with any financial app, all of the attempts to penetrate the earth. And we're really proud of the walls that have been built here to protect both the bank and our future clients to Unify. The feedback has been very positive in terms of how familiar the user interface is. It's intuitive. You know, we take no shame in saying that, you know, we were inspired by companies like Apple and who we think over the years have developed a very intuitive way of doing business in the digital world. And look, we'll be getting our advertising here in the near future. You'll see more on our landing pages that begin to tell the story. And candidly, there's a big element there that's going to be coming soon because as we had told the market, We're starting with a fundamental, simple product that's absolutely incredible for a small business owner, which is a depository sweep product that allows these interest owners to access attractive interest rates on their deposits while maintaining their operating accounts to you. But that's just the beginning. I mean, the beginning, as we've said before, is building this full ecosystem where you're essentially a small business owner able to do one-stop shopping anywhere in the United States for your business needs. We'll be working with both private credit and other banks to offer alternatives on credit. First out of this shoot there, you're going to see an SBA offering that will be introduced. We're also working with a merchant payments company on a fairly creative approach to helping small businesses realize the lowest possible rate on their merchant transactions here in the United States. And we think that can be a huge driver. Ultimately, I will tell you that I think given the data lakes we've built, we've invested millions and millions of dollars in information management. that 2Unify is going to be more of an information company than a bank. You know, we built it not to be reliant on, with all due respect, the big core suppliers like FIS and Fiserv. We're more nimble. We have more control of our clients' information. That allows us to give more information back to our clients. And it also certainly helps us as we look at how we'll be able to manage risk by having all of that information contained. And then finally, I would tell you that we ultimately see this as being a membership fee-based business. You know, if a business owner wants to transact and work within the 2Unify ecosystem, they're going to pay a monthly membership fee no different than what you would see or what you would pay today with an Amazon for your Amazon Prime membership. So that's maybe, Charlie, even more color than you were looking for, but I hope that helps.

That's great. And just to clarify, this is mainly coming through fee income, or do you expect this to be like a balance sheet play where you're aiming to –

It's a great question. We're not focused on this as a big balance sheet play. We really aren't. I mean, again, think about on the credit front, we may be a partner in originating loans, but the reality is what we want to do is make it easy for a plethora of United States banks, mostly community banks, to access lending opportunities to small and medium-sized business. And for that, we would collect a fee or a scrape. The deposits, we're able to think about how we leverage Canberra to take those deposits and then sweep them as broker deposits to other financial institutions. And so, again, not a heavy balance sheet play. High ROE big on information and membership fees.

That's great. Thank you. Thanks, Charlie. And then last one, just switching gears. The M&A environment has seen a little bit of a pickup. Just wondering if you're seeing the pace of conversations pick up and if you could remind us, like, what you're looking for in a partner size-wise and other characteristics. Thanks.

We're very consistent. You know, we start with culture and strategy. We only consider institutions that are in strong growth markets. And we've got to be in a position where when we announce the transaction for the sake of both parties, the market reacts positively. And so that certainly means we have strong earnings accretion expectations we have a real focus on how quickly we can earn back any tangible dilution and will not stray from those criteria. As to specifics, I'm going to simply say I can't comment right now.

Okay, great. Thank you. I'll step back.

Thank you. We will take our next question from Andrew Terrell with Stevens.

Hey, good morning.

Good morning.

Hey, I wanted to ask on just deposits this quarter, you know, down sequentially, end of period, kind of in line with the decline in loans we saw. I'm just curious, was any of the deposit decline this quarter reflective of or tied to the de-risking that's gone on in the loan portfolio or just any color you can provide on the two key deposit flows and then, you know, kind of tying that into it? It sounds like loan growth expectations will back out for the year for an improvement. Would you expect core funding to increase sequentially?

Andrew, I'm going to begin and quickly hand this off to Aldis, but you nailed it. Yeah, I mean, obviously, we're moving entire relationships when we move credit exposure forward. And, you know, that's largely the matter. And then, Aldous, I'll throw it to you.

You answered the question. So, yeah. More detail. As we've always talked, we are a relationship bank model, and both sides of the balance sheet do tend to move in tandem. One thing that we haven't done is go off and buy expensive deposits just to show, again, growth. As evidenced, really, if you look at our deposit data, this last cycle is about 30%, so that shows through the cost of funds. But to kind of come back, the pipeline is there. Trading management opportunities are there as we look in the second half of the year through relationship opportunities that we are looking to take market share and look to grow the deposits in the second half as well.

Understood. Thank you. I appreciate it. If I could ask just on the expense side, I don't know if you're able to, but could you share any more color kind of around the expense reduction that happened during the second quarter specifically that it sounds like, you know, compensation costs coming down? I'm wondering if that's, you know, focused on any specific avenues within the bank or just, you know, more broad-based.

Absolutely. Good morning, Andrew. I'll be happy to take that one and touch on our expense reduction plan that we wrapped up in June. I will start by saying we do not take these decisions lightly, but in light of the economic uncertainty, we knew it was prudent to be proactive in this area. It was a bank-wide effort, and as a result of the actions that we took, we did eliminate positions across our organization. And we had a heavy focus on streamlining our processes and implementing automation.

Okay. Thanks for the call, Nicole. I'll step back. Thanks. Thank you.

Thank you. We will take our next question from Brett Rabaton with Hefty Grip.

Great. Good morning.

Hey, good morning, everybody. Why don't you stick with expenses for a second and just make sure on the guidance for the 126 to 128 for the back half year, is that, you know, when I think about the math, that's inclusive of two unified $16 to $17 million, or is that on top of the 126 to 128?

You're right. It is inclusive of the two unified $16 to $17 million guide.

Okay. And then so it sounds like you guys did a really good job, you know, with finding some expenses to pull out without, you know, impacting the need for a restructuring charge. And I didn't quite catch the color on the detail of it, and, you know, you took some actions. Would any of that be contract for things like that? Because it doesn't seem like it was, you know, personnel related.

No, I mean, it was a hard reduction in our personnel count. And it was really, while we talk about executing in the second quarter, to give the teams credit, this is work we've been building to for some time. And literally, looking at opportunities where you would have natural retirement, nutrition, etc., to really achieve these. That's in large part why and how we were able to keep our expenses down in the process. I think, Nicole, they, you know, literally came in under $400,000 in total related expense. Is that right?

Right. It was about $300,000.

Yeah, actually three. And I, you know, I We will continue to lean into opportunities to leverage emerging tools to bring down our core operational expense run rates.

I may now – I'll just – Sorry, if I could. What we looked at, as Nicole touched on, is operational efficiency automation. So what makes us excited about this round of kind of efficiencies is also that we'll be able to leverage that as we grow the company. Our expense run rate is not going to have to pace that growth.

Okay. That's probably helpful. And then, you know, Tim, in the past, you know, just back on the loans, it sounds like this quarter was almost entirely related to reducing some risk exposure. But in the past, you've kind of indicated that maybe some banks or non-bank competitors were being too aggressive with rate or terms. And so I just wanted to hear what you guys were seeing in terms of the environment competitively and if that was any factor in the second quarter.

Yeah, look, I'm going to simply say, and I was reviewing this with our head of portfolio management last week, our hit rate on term rate on term offerings right now is lower than our historical rate. I mean, we're coming in around 27 to 30% right now. Typically, by the time we get to putting a term sheet on the table, we're seeing a much higher hit rate. And what we're not going to do is renegotiate on credit risk structure or pricing. And, you know, so that requires time and patience. And I'll answer your question that way versus talking about competition.

Okay. That's helpful. Thanks for all the color, Tim.

You bet. You bet.

Thank you. 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, Rachel, and thank you for joining us today. We appreciate your time and attention. If you have follow-on questions, do not hesitate to reach out to us, and we wish you a good day.

And this concludes today's conference call. Thank you very much and have a great day. You may now disconnect.