National Bank - Earnings Call - Q2 2025

Transcript

Operator (participant)

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.

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.

Tim Laney (Chairman and CEO)

Thanks, Rachel. Good morning, and thank you for joining us as we discuss National Bank Holdings Corporation’s second quarter results. I’m joined by our President, Aldis Birkans, as well as our Chief Financial Officer, Nicole Van Denabeele.

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 on July 30. Activity has been solid, particularly in light of the fact that we have not even launched our marketing campaigns. Furthermore, user feedback has been quite positive. On that note, I’ll turn the call over to Nicole.

Nicole Van Denabeele (EVP and CFO)

Thank you, Ken, 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 Federal Reserve.

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.

Turning to deposits, seasonal cash outflows resulted in a decline in average deposit balances of $58.8 million during the quarter. Passive deposits totaled 2.05%, and our total cost of funds was 2.09%.

For the second half of 2025, we project our total non-interest income to be in the range of $34 million–$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 first-quarter expenses.

We now project our non-interest expense for the second half of the year to be in the range of $126 million–$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 our 2025 year-end results.

We ended the quarter with a strong TCE ratio of 10.5%, a 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.

Aldis Birkans (President)

Thank you, Nicole, and good morning. As Tim and Nicole already mentioned, loan production activity 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.

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.

We continue to see solid credit metrics, with just five basis points in annualized net charge-offs and non-performing assets continuing their 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%.

Tim Laney (Chairman and CEO)

Thank you, Aldis. 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 one 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.

Operator (participant)

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

Jeff Rulis (Analyst)

Thanks. Good morning.

Thanks, Rachel.

Tim Laney (Chairman and CEO)

Hey, Jeff. Good morning.

Jeff Rulis (Analyst)

On the loan side, it sounds fairly cautious. I just want to check in on the amount of those higher-risk trucking, agriculture, and commercial rail CRE exposures. Are you guiding us to resume toward a mid-single-digit pace? It sounds like the bulk of what you wanted to clean up is largely done.

Tim Laney (Chairman and CEO)

Yeah, I’ll answer both together, if that’s all right, Jeff. 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. We’ve been operating for years as though, and we’ve been regulated as though, we were a 10-plus-billion-dollar bank. That expense has been embedded in our run rate for years, so there’s no issue there.

You know, I’ll also remind you that we operate well under all regulatory limits, with our own house limits. None of the areas we’ve discussed have even approached those internal thresholds. This was really an act of caution and being proactive. As I mentioned in my prepared remarks, I truly believe it’s the kind of action you have to take that translates into more productive results down the road.

Aldis Birkans (President)

I’ll add to that in terms of optimism for the second half. Our pipeline is strong, as I mentioned, and I would actually characterize it as the strongest we’ve seen in the last 12 months as we entered the third quarter. There is activity and a pipeline to support our guided mid-single-digit growth for the second half. Subject to what’s been mentioned, there are other opportunities, and we’ll certainly act on those.

Jeff Rulis (Analyst)

Okay, I appreciate it.

Tim Laney (Chairman and CEO)

Any other questions, Jeff?

Jeff Rulis (Analyst)

Yeah, no, that was great. I appreciate that — that was pretty detailed, so thank you. If I could hop to the margin, you’ve provided steady guidance from here. From our prior discussions, it sounded like you had some solid opportunities, and based on those new loan yields, some favorable reinvestment potential — not only in loans but also in securities — and that was encouraging.

Aldis Birkans (President)

First, I’ll say we’re very proud of the 3.95% margin. I think that puts us in very good company among our peer banks. In terms of the outlook, what would really move our margin in a positive way is DDA growth. At the end of the day, it’s the math of math — bringing in zero-cost deposits and lending them out at 7.4%. That’s obviously extremely margin accretive. I think the deposit mix will ultimately drive the outlook for the margin.

Jeff Rulis (Analyst)

Okay. Great. I'll step back. Thank you.

Tim Laney (Chairman and CEO)

Thanks, Jeff.

Operator (participant)

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

Kelly Knightley (Analyst)

Hi. This is Charlie on for Kelly. Good morning.

Tim Laney (Chairman and CEO)

Hello, Charlie.

Kelly Knightley (Analyst)

It was exciting to see the 2Unify launch this month, along with the platform and the partnership with Nav. Can you speak about how the launch went and how the market is receiving 2Unify, and provide some color on the partnership — how it came about and what benefits you think it can bring to the platform?

Tim Laney (Chairman and CEO)

Yeah, I would compare our launch to the soft opening of a restaurant. We had completed prior friends-and-family testing in a controlled environment, and now we’re in a position where anyone can access the app and begin the process.

The feedback has been very positive regarding how familiar and intuitive the user interface feels. We take no shame in saying that we were inspired by companies like Apple, which over the years have developed a remarkably intuitive way of doing business in the digital world.

The beginning, as we’ve said before, is about building a full ecosystem where, as a small business owner, you’re essentially able to do one-stop shopping anywhere in the U.S. for your business needs. We’ll be working with both private credit providers and other banks to offer credit alternatives.

You know, we built it not to be reliant on, with all due respect, the big core providers like FIS and Fiserv. We’re more nimble and have greater control over our clients’ information, which allows us to provide even more insights back to them. It also helps us better manage risk by having all that information contained within our ecosystem.

Kelly Knightley (Analyst)

That's great. Just to clarify, this is mainly coming through fee income. Do you expect this to be sort of like a balance sheet play? Are you aiming to get loans and deposits?

Tim Laney (Chairman and CEO)

It’s a great question. We’re not focused on this as a big balance sheet play — we really aren’t. On the credit front, we may be a partner in originating loans, but the goal is to make it easy for a wide range of U.S. banks, primarily community banks, to access lending opportunities for small and medium-sized businesses. For that, we would collect a fee or a scrape.

Kelly Knightley (Analyst)

That's great. Thank you.

Tim Laney (Chairman and CEO)

Thanks, Charlie.

Kelly Knightley (Analyst)

Last one, just switching gears. The M&A environment is seeing a little bit of a pickup. Just wondering if you're seeing the face conversations pick up and if you could remind us what you're looking for in a partner size-wise and other characteristics.

Tim Laney (Chairman and CEO)

We’re very consistent. We start with culture and strategy. We only consider institutions operating in strong growth markets. We have to be in a position where, when we announce a transaction, the market reacts positively — for the sake of both parties. That means we must have a strong expected earnings increase, and we maintain a real focus on how quickly we can earn back any tangible book value dilution. We will not stray from those criteria.

Kelly Knightley (Analyst)

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

Operator (participant)

Thank you. We will take our next question from Andrew Pikul with Stephens.

Andrew Pikul (Analyst)

Hey, good morning.

Aldis Birkans (President)

Good morning.

Andrew Pikul (Analyst)

I wanted to ask on just deposits this quarter, down sequentially in the 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? Any color you can provide on the two key deposit flows and then tying that into it sounds like loan growth expectations in the back half of the year for an improvement. Would you expect core funding to increase sequentially?

Tim Laney (Chairman and CEO)

Andrew, I'm going to begin and quickly hand this off to Aldis, but you nailed it. Obviously, we're moving entire relationships when we move credit exposure. That's largely the matter. Aldis, I'll throw it to you.

Aldis Birkans (President)

Figure it out through the first quarter.

So yeah.

More detail.

More detail — as we’ve always discussed, we operate under a relationship banking model, and both sides of the balance sheet tend to move in tandem. One thing we haven’t done is go out and buy expensive deposits just to show growth. As evidenced by our deposit data from this last cycle, it’s about 30%, and that shows through the cost of funds.

Andrew Pikul (Analyst)

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

Nicole Van Denabeele (EVP and CFO)

Good morning, Andrew. I'll be happy to take that one. That's on our expense reduction plan that we wrapped up in June. I will start by saying we do not take these decisions lightly. 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. We had a heavy focus on streamlining our processes and implementing automation.

Andrew Pikul (Analyst)

Okay, thanks for the color, Nicole. I'll step back. Thanks.

Tim Laney (Chairman and CEO)

Thank you.

Operator (participant)

Thank you. We will take our next question from Brett Rabatin with Husky Group.

Brett Rabatin (Analyst)

Brett, good morning.

Hey, good morning, everybody.

I wanted to stick with expenses for a second and make sure I understand the guidance for the $126 million–$128 million for the back half of the year. When I think about the math, is that inclusive of the 2Unify $16 million–$17 million guidance, or is that on top of it?

Nicole Van Denabeele (EVP and CFO)

You're right. It is inclusive of the 2Unify $16 million to $17 million guide.

Brett Rabatin (Analyst)

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

Tim Laney (Chairman and CEO)

No. I mean, it was a hard reduction in our personnel count. 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. Literally, looking at opportunities where you would have natural retirement, attrition, 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 literally came in under $400,000 in total related expenses. Is that right?

Nicole Van Denabeele (EVP and CFO)

Right. It was about $300,000.

Tim Laney (Chairman and CEO)

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

Aldis Birkans (President)

I'll just was that in? Sorry right there. No, What we're looking at, Nicole touched on, is operational efficiency automation. What makes us excited about this round 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 face that growth.

Brett Rabatin (Analyst)

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

Tim Laney (Chairman and CEO)

Yeah. I’m going to simply say, I was reviewing this with our Head of Portfolio Management last week. Our hit 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. What we're not going to do is renegotiate on credit risk structure or pricing. That requires time and patience. I'll answer your question that way versus talking about competition.

Brett Rabatin (Analyst)

Okay, that's helpful. Thanks for the color, Tim.

Tim Laney (Chairman and CEO)

You bet. You bet.

Operator (participant)

Thank you. As I'm not ensuring you 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. We wish you a good day.

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.