Operator: Good morning, everyone, and welcome to the National Bank Holdings Corporation 2026 Q3 earnings call. My name is Jess, 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. I would now like to turn the conference over to Emily Gooden, Chief Accounting Officer and Director of Investor Relations.
Emily Gooden: Thank you, Jess, 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 risks, uncertainties, and other factors which are disclosed in more detail in the company's most recent filings with the US 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.
Emily Gooden: Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the financial 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.
Tim Laney: Thank you, Emily. Good morning, and thank you for joining us as we discuss National Bank Holdings' Q3 2026 financial performance. I am joined by our President, Aldis Birkans, and our Chief Financial Officer, Nicole Van Denabeele. We made progress this quarter on important priorities: serving clients, building durable relationships, and advancing the Vista integration. We also face significant credit challenges in a small number of commercial loan relationships, primarily in the franchise and healthcare industries. We want to be direct about those events and their impact. We have taken a measured hands-on approach, completing our collateral assessment, recognizing the credit impact, and applying what we learn. These events are serious, but they are concentrated in specific relationships. Our broader focus remains on serving clients well, growing with discipline, and maintaining the strength and flexibility of the company.
Tim Laney: We enter the next phase with a committed team, strong client relationships, and clear priorities. We will discuss the quarter's results, credit performance, and outlook in more detail today, and I want to thank you for your continued interest in National Bank Holdings. With that, I will turn the call to Nicole to walk us through the financial results. Nicole?
Nicole Van Denabeele: Thank you, Tim, and good morning. For the Q3, we reported a net loss of $8.8 million, or $0.20 per diluted share. On an adjusted basis, removing the impact of acquisition and restructuring expenses in the quarter, we reported net income of $2.9 million, or $0.06 of earnings per diluted share. As we shared earlier this month, the Q3's results were impacted by elevated provision expense related to a handful of specifically identified credits addressed during the quarter, as well as an impairment on one third-party fintech investment. Core banking activities remain strong, with an increase in year-to-date pre-provision net revenue of 8% annualized.
Nicole Van Denabeele: During the quarter, loan production was solid, and we grew average deposits by 3.7% annualized while maintaining a top-quartile net interest margin. Also, we successfully completed our Vista Bank core systems integration during the quarter and executed the remaining expense reduction action.
Nicole Van Denabeele: Turning to the balance sheet. Client activity was strong during the quarter. Our teams generated quarterly loan originations of $819 million, driving year-to-date annualized loan growth of 8.1%. Pipelines remain strong, and we expect to achieve full-year loan portfolio growth of 10%. Fully taxable equivalent net interest income increased 13% annualized for the quarter to $115.2 million. Net interest margin during the Q3 was a strong 4%. We expect a net interest margin near 4% for the remainder of the year, which does not include any future interest rate policy changes by the Fed. We continue to fund our loan growth with core deposits. Average total deposits grew $96 million, or 3.7% annualized during the quarter, and average transaction deposits grew $103 million, or 4.6% annualized.
Nicole Van Denabeele: We remain disciplined in managing deposit costs, with only one basis point of deposit cost increase for the quarter and ended September with a low cost of deposits of 1.96%. Total cost of funds increased two basis points to 2.03% for the quarter. The loan-to-deposit ratio ended the quarter at 93.8%. Turning to asset quality. We recorded $40.6 million of provision expense to cover the quarter's elevated net charge-offs. As previously disclosed, Q3 net charge-offs totaled $46.3 million, reflecting actions taken on specific commercial loans following adverse credit events during the quarter. These credits also resulted in non-performing assets increasing by 15 basis points or $15 million. Additionally, we hold $14.3 million of marks against our acquired loan portfolio, which provides an additional 15 basis points of loan loss coverage if applied across the entire loan book. Turning to fee income.
Nicole Van Denabeele: Non-interest income totaled $13.5 million and, as previously disclosed, was impacted by a $4 million impairment on one third-party fintech investment. Aldis will share more on fee income momentarily. We expect Q4 fee income to be in the range of $17 to $18 million. Non-interest expense totaled $97.8 million for the quarter and included $15.2 million of acquisition and restructuring expenses. Excluding these one-time items, non-interest expense was $82.6 million, a decrease of $1.1 million from the prior quarter. The Q3 included one additional payroll day compared to the Q2 and included elevated problem loan expense of $1.4 million for the quarter. We have fully executed on our cost-saving strategies, and as a result of our strong execution, we expect a clean expense run rate in the Q4, with core non-interest expense in the range of $75 to $77 million.
Nicole Van Denabeele: Our capital levels remain well in excess of well-capitalized regulatory thresholds. Common equity tier 1 ratio ended the quarter at 11.7%, and our total capital ratio was 14.7%. The tangible common equity ratio ended the quarter at 9.2%. Tangible book value per share was $25.37, reflecting the quarterly dividend payout and $12 million of share repurchases during the quarter. Importantly, we continue to target quarterly earnings in excess of $1 per share in the Q4. With that, I will turn the call over to Nicole.
Aldis Birkans: Thank you, Nicole. Let me begin with credit. As Tim shared, this was a disappointing quarter for us, and we recognize the importance of addressing both the immediate issues and their underlying causes. This quarter's loan losses were concentrated in the franchise and healthcare verticals within our specialty banking group. Over the past 12 months, we have upgraded our specialty banking team leadership, and during the Q3, we conducted additional in-depth reviews and implemented further enhancements across our credit risk governance. These steps are intended to strengthen accountability and improve consistency on how risk is identified, escalated, and managed. Throughout the year, we also have diversified these portfolios, and our current exposure is limited to approximately 5% of total loans in franchise and approximately 3% in healthcare finance. During the quarter, we also executed on a new model for serving small business clients.
Aldis Birkans: Under the new model, we will lean more heavily into our banking center network with an increased focus on deposit gathering. The objective is to create a more consistent client experience and align resources more closely with the needs and economics of this segment. We expect these organizational changes to reduce our operating expenses by approximately $4 million annually. Turning to the loan book. On an annualized basis, loans grew 5% during the quarter, bringing year-to-date growth to 8.1%. Early in the quarter, our teams successfully completed the Vista Core system integration, an important milestone that positions us to operate on a unified platform and focus fully on serving clients. With this achievement behind us, our teams are focused on growth and our pipelines continue to build heading into the Q4. We remain on track to deliver 10% loan growth for full-year 2026.
Aldis Birkans: Achieving that level of growth would take our total loans outstanding to above $10.1 billion by year-end. Average deposits grew a solid 3.7% annualized during the quarter, led by 4.6% annualized growth in average transaction deposits, reflecting continued strength in our core deposit franchise and our focus on growing high-quality relationship-based funding. This favorable deposit mix, combined with disciplined balance sheet management, contributed to a strong 4% net interest margin for the quarter. Finally, turning to the fee income, the underlying performance of our core banking business remains solid. During the quarter, combined service charges and bank card fees grew at an annualized rate of 12%, reflecting continued momentum from these recurring revenue streams. Additionally, we continue to see solid contributions from our Cambr and trust and wealth teams.
Aldis Birkans: On the strength of our core franchise, improving operating discipline, and growing client pipelines, we enter Q4 with a confidence in our ability to build on this momentum. Tim, with that, I will turn it back to you.
Tim Laney: Thanks, Aldis. Well, we have covered a lot of detail in our opening comments, so why don't I go ahead and open up the call for questions?
Operator: Thank you. Ladies and gentlemen, if you would like to ask a question, you can signal by pressing star one on your telephone keypad. Again, press star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal. We will go first to Jeff Rulis with D.A. Davidson.
Jeff Rulis: Thanks. Good morning.
Tim Laney: Good morning.
Jeff Rulis: Just to, I guess, the first bit on credit. If you could you itemize the size of those credits, both in the franchise and healthcare, the resolution path ahead. Then lastly, expectation for net charge-off levels going forward. Or is this sort of in the rearview? Thanks.
Tim Laney: You bet.
Nicole Van Denabeele: Yeah, Jeff, good morning. This is Nicole. So related to your charge-off question on the credits that we addressed in Q3. We addressed a principal balance of credits totaling about $65 million, and we took net charge-offs on those credits of about $47 million. That leaves a remaining balance of $18 million on our books related to those credits, and those are supported by collateral and personal guarantees of the borrowers.
Jeff Rulis: Okay. Just the makeup of the $65 million in credits. What was franchise and what was healthcare?
Tim Laney: Yeah.
Jeff Rulis: Or what's left is fine.
Tim Laney: Jeff, I will start with high level and then perhaps Aldis Birkans can fill in with a bit more detail. When you size this up and we talk about a handful of credits, the reality is this was an event primarily centered in two credits, one franchise, one healthcare. The franchise, of course, was this Qdoba Dave's Hot Chicken franchise that we have dealt with, where the first issues, frankly, came to light in July. By August, we were in a process of seeing some retrading on really the sell of the collateral involved to cover our loan exposure and found ourselves with a deficit, and quite frankly, found ourselves in that situation in a position where we believed it was merited to file suspicious activity reports and address what we believe is client fraud.
Tim Laney: In the other situation, it was a healthcare-related event that we had dealt with in Q4 of last year, had conducted a full restructure with the client, brought in a third-party consultant, believed management was in a position to move the company forward with one of its other divisions, and frankly, that process ran out of steam and left us in a position of working with the borrower to take the company into bankruptcy. Those are the two big drivers. I do not know if you want to discuss the breakdown as it relates to the rest of the franchise. By the way, we do not view these as some indication of systemic problems. As a practical matter, when we review our credit policies and practices, our risk management policies and practices over the life of our company, they have served us well.
Tim Laney: These were cases where, frankly, the bankers involved did not execute on our policies and practices, and those bankers are no longer with us.
Aldis Birkans: Yeah. Jeff, of that 65 that Nicole mentioned, approximately 45% is healthcare, 45% is franchise.
Jeff Rulis: Thank you, Aldis. The net charge-off question was going for, we got it in the release what you charged off. But the expectation for just the overall bank ahead and the charge-off expectations, is there any further cleanup, or we revert to historical levels Q4 and beyond?
Nicole Van Denabeele: Yeah, our expectation is that we've addressed what needed to be addressed this quarter such that we expect normalized levels going forward.
Jeff Rulis: Thanks. Aldis, if I could hop to the margin. Nicole, sorry. Was there any impact on the margin in terms of loans placed on non-accrual in terms of lost interest? On the outlook, sounds like around 4%, if you could outline should we have another rate hike, what the impact of that would be. Thanks.
Nicole Van Denabeele: Yes. I will take that one, Jeff. You are hitting on a few good points of consistently there will be puts and takes to our margin. We did have some interest reversals in margin for the quarter. We also had some pickup from accelerated accretion. I will say those two kind of washed in the quarter. We exited September with a 4% margin. Our expectation is that we will be able to hold that for Q4. Regarding your question of what do we expect the impact to margin will be with future rate changes, I will take us back to the last time that we were in a rate-up environment.
Nicole Van Denabeele: We were successful at maintaining our deposit costs, and through that rate-up cycle, we held a deposit beta of under 40%. We believe we will continue to be able to be disciplined on our deposit pricing.
Jeff Rulis: Thanks, Nicole. If I could squeeze one more in there. On the merger costs, any chance you could map those in terms of, did a lot of that come in the comp or other? Just trying to back that out of the current quarter.
Nicole Van Denabeele: Yes, I will say it is largely been concentrated within the compensation and benefits line. There are really impacts hitting in all lines, occupancy and equipment, processing fees, and professional fees. The bulk of what hit the Q3, and frankly for the year, has been in personnel expense.
Jeff Rulis: Okay. Thank you. Appreciate it.
Aldis Birkans: Thank you, Jeff.
Operator: We will go next to Kelly Motta with KBW.
Kelly Motta: Hey, good morning.
Aldis Birkans: Good morning.
Kelly Motta: On your core expense guide of $75 million to $77 million for Q4, you also noted there was about $4 million annual benefit from some of the changes you have made in the business. I know you have the benefit of the post-conversion expense run rate. Just wondering what of the $4 million benefit might be already baked into that Q4 number. Thanks.
Aldis Birkans: It is, Kelly. So that $4 million that I talked about in terms of the reorganization and how we go to market for business banking or small business is embedded. Along to what Nicole Van Denabeele was saying, it will show up mostly in the benefits and salaries line.
Kelly Motta: Got it. That is helpful. With the credit, it was obviously a disappointing quarter. You have noted you have made some changes, some changes in personnel, and exposure is fairly limited at this point. Just wondering if, as part of the identified issues and changes, if you have done a third-party review of these books. What gives you comfort that this is now behind you? Thanks.
Aldis Birkans: No, as I mentioned in my prepared remarks, we delved in quite closely to the full portfolio with a very much closer eye to the portfolio originated by the bankers that Tim mentioned. Our loan review team, our SAG team, our chief credit officers have gone through it and we feel very comfortable where we are today with portfolio looking forward. I will say also that throughout the year, we have worked very hard on churning that book away from either brands or the operators that we did not like, to put it bluntly, and $150 million of the franchise book is being turned over year-to-date.
Tim Laney: I think that is an important point, Kelly, this is not a process that just began in Q3. We have been working this franchise exposure since Q4 of last year, and again, have methodically exited over $150 million of exposure that we felt was not originated against the standards that we are comfortable with.
Kelly Motta: Okay. Got it. Your release noted the expected sale of the Palm Beach location. Just wondering if I think you gave the loans and I believe the deposits associated with this action expected to take place next year, but wondering overall financial impact, if there is maybe some additional expenses that come out. Thanks.
Nicole Van Denabeele: Yeah, I will take that. It will end up having minimal impact to our EPS. There will be some expenses that come out. I think it should be right around half a million. No, it is $2 million.
Aldis Birkans: It's $2 million. Half a million you're thinking from because of the timing of this. On an annualized basis, about $2 million of operating expense that comes off the books on an annualized basis. As we mentioned in the release, about $200 million of loans and deposits. You apply 4% margin, you can see what the revenue is given up. So to Nicole's point, once you net that out, it's really nominal EPS impact.
Tim Laney: I would just add strategically, look, it's a fine operation, a solid smaller team, and what we believe is we can generate greater returns focusing on our core markets and continuing to build those core markets. We were able to really create a win-win transaction here with the team that has run that bank, and we think we've ended up in a very transaction for both parties. So, that's where I would leave that.
Kelly Motta: Got it. That's helpful. I guess last question for me. It looks like the fee guidance is a bit lighter than maybe what was implied for the full-year. I imagine maybe we get the mortgage obviously has something to do with that. Just wondering if you could kind of break down the changes in the outlook here today versus what you may have been expecting a quarter or 2 ago. Thanks.
Aldis Birkans: Kelly, this is Aldis. You picked up on the main driver in the change, and that one is the mortgage. Residential mortgage business suddenly has been impacted by the steeper and higher rate environment. Conventional mortgages being about 7% again on sale is, or secondary market is quite tough. Having said that, we have seen a bit more volume go on the portfolio. You can see that in our loan tables. We had a nice portfolio growth in residential mortgage, but in terms of gain on sale, it is tougher going, especially going into Q4, that's seasonally low quarter.
Kelly Motta: Got it. Thank you so much.
Tim Laney: Thank you, Kelly.
Operator: We will go next to Matthew Clark with Piper Sandler.
Matthew Clark: Hey, thank you. Good morning.
Aldis Birkans: Good morning.
Matthew Clark: You mentioned churning about $150 million on the franchise side. How much did you kind of churn or de-risk within the healthcare portfolio? I guess that is my first question. Thanks.
Aldis Birkans: Sure. Yeah, Matthew Clark, actually, a similar dollar amount, $150 million exit in healthcare throughout the year. The portfolio is down on healthcare $100 million year-to-date. So back to getting 10% loan growth. That is something that we consciously have been working behind the scenes to de-risk the portfolio in general, but continue to meet our loan growth targets.
Matthew Clark: Okay. Great. And then just around the series of personnel changes. Did that include a new chief credit officer? If so, has he had a look at the overall portfolio and blessed it, or is that process still underway?
Aldis Birkans: We have brought in a new chief credit officer over the last year and a half, and he has certainly engaged unlike ever before in all of the detailed reviews that have been conducted. We did exit a number of senior credit officers that were involved in, frankly, the oversight of the bankers that have also moved on. Obviously those are painful actions, but actions we felt necessary to ensure that our policies and practices when it comes to risk management are respected and well executed.
Matthew Clark: Great. Just criticized loans or assets, where they stood at the end of September. I think they were, according to the 10-Q, $298 million or 3.05% at the end of June.
Aldis Birkans: Yeah. Criticized assets at end of September were 3.4%, so a slight uptick. Classified, I will say, were about flat to prior quarter at 1.38%.
Matthew Clark: Great. Just the purchase accounting accretion impact to dollars this quarter.
Nicole Van Denabeele: Yeah. Good morning, Matthew. I will touch on that one. As I mentioned previously, we did have some puts and takes to margin this quarter. We had some impact of accelerated loan accretion that impacted the quarter, but that was largely offset by some non-accrual interest reversals. So, the NIM that you are seeing is a core NIM.
Matthew Clark: Right. But in terms of dollars, so we can model the yield and the accretion. So interest reversals, how much was that in dollars and how much in accretion in dollars, given that they offset?
Aldis Birkans: We have not historically provided that, and the reason is it has never been really material to our margin or loan yields. So we would like to keep it that way unless we do a market acquisition that it is so material that it makes a difference. We will certainly disclose at that time, but historically it has not been, and we will keep it that way.
Matthew Clark: Okay. Fair enough. Thanks.
Aldis Birkans: Thank you.
Operator: Thank you. I am showing we have no further questions at this time. I will now turn the call back to Mr. Laney for his closing remarks.
Tim Laney: Well, again, thank you for your continued interest in National Bank Holdings, and I wish you all a good day.
Operator: Thank you, sir. 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 Events and Presentations page. Thank you very much and have a great day. You may now disconnect.
