Timothy Laney - Chairman, President and Chief Executive Officer Brian Lilly - Chief Financial Officer Richard Newfield - Chief Risk Management Officer.

Christopher Mcgratty - Keefe, Bruyette & Woods, Inc. Jeffrey Rulis - D. A. Davidson & Co. Tim O'Brien - Sandler O'Neill & Partners LLP Matthew Olney - Stephens Inc..

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2017 Second Quarter Earnings Call. My name is Lisa and I will be your conference operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session following the presentation.

As a reminder, this conference is being recorded for replay purposes. I would like to remind you that this conference call will contain forward-looking statements, including statements regarding the Company's loans and loan growth, deposits, strategic capital, potential income streams, gross margins, 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 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. It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman, President and CEO, Mr. Tim Laney. Please go ahead..

Thank you, Lisa. Good morning and thank you for joining National Bank Holdings' second quarter earnings call. I have with me our Chief Financial Officer, Brian Lilly; and Rick Newfield, our Chief Risk Management Officer. We continued to be very pleased with the progress and pace of our organic growth.

Our teammates delivered another quarter of strong loan growth, deposit growth, banking fee income growth, and solid expense control. Credit trends are in line with our plan and trends are in fact very positive across our diverse portfolio. We are also pleased with the response to our recently announced planned merger with Peoples.

I look forward to our associates coming together, continuing to build quality relationships with our clients, and delivering greater returns for our shareholders.

To that end, this quarter marked another milestone as our Board of Directors declared a $0.09 per share dividend on May 3, 2017, which represented a 29% increase from the previous dividend of $0.07 per share.

The increase demonstrates the continued confidence of our Board of Directors and Management Team that our Company is in the financial position to provide very strong future growth opportunities. We feel very good about our accomplishments during the second quarter. And equally important, we are pleased with the outlook for the rest of the year.

And on that note, Rick I’ll turn the call over to you..

Thank you, Tim, and good morning. I’ll jump right into covering our credit metrics and trends during the second quarter. Classified loans continue to positive trend in the second quarter further decreasing from the first quarter and our outlook remains favorable in the coming quarters.

With $84,000 in net recoveries for the quarter, bringing year-to-date net charge-offs to virtually zero. 30-day past dues remain well contained at only 16 basis points with about 1 basis point of past dues of 90 days or greater.

Non-accrual loans decreased by about $2 million in the quarter, with the non-accrual ratio improving from 1.2% as of March 31, 2017 to 1.1% as of June 30, 2017. Let me address the large specific reserve we took in the quarter.

To put this in perspective, this is only our second originated commercial loan outside of energy where we are taking a material loss since our Company's inception. I view this as a one-off. We delivered $270 million of loan originations during the quarter.

Commercial loans represented 71% of the second quarter originations, non-owner occupied commercial real estate was 18% and well diversified across a number of property types and consumer, principally single-family residential loans was 11%. Consistent with prior quarters, our new production was granular in nature.

We maintained our discipline adherence to self-imposed concentration limits across industries sector and real estate property types. Non-owner occupied commercial real estate is only 17% of our total loan portfolio and only 104% of our Company’s risk-based capital, and no individual property type exceeds 3.5% of total loans.

We continue to maintain very little exposure retail properties, no exposure to malls, and less than 1.5% of our total loan portfolio is in multifamily.

Furthermore, we are well diversified across a broad spectrum of commercial and industrial sectors with most industry sector concentrations at 5% or less of total loans and all concentration levels remain well below our self-imposed limits.

With respect to recent downward pressures on all prices, our energy loan portfolio continues to demonstrate overall stability with no new adversely rated energy loans year-to-date and during 2016. We continue to have three energy loans on non-accruals totaling $12.1 million, the remainder of problems loans identified in 2015.

87.8% of our energy loan portfolio is pass rated and the total reserve for loan losses on the energy portfolio was 4.3% consistent with the prior quarter end. Provision expense for the remainder of 2017 will primarily cover net loan growth.

We are maintaining our prior guidance for net charge-offs of 10 basis points to 20 basis points for the full-year. And given our very low level in net charge-offs year-to-date, we do expect our charge-offs in the second half of the year. However, those charge-offs will be principally against loans with specific reserves already in place.

Therefore, the impact provision expense is expected to be nominal. We sometimes get asked about our relatively high ratio of non-performing assets to total loans in OREO relative to peers, which was 1.51% as of June 30, 2017. Let me break down that ratio into three distinct buckets within these assets.

First, about 62 basis points or 40% of those non-performing assets are acquired loans and OREO and we view these acquired loans and OREO as a profit center as evidenced by the nice gains during this past quarter.

We will continue to mine opportunities in this portfolio and expect very attractive OREO gains in future quarters, albeit lumpy from quarter-to-quarter. That leaves about 90 basis points of non-performing assets.

Second about 39 basis points or a fourth of our non-performing assets or energy non-accrual loans, the remainder problems we identified in 2015. We view these as isolated to energy sector stress and not reflective of the balance of our commercial loan portfolio.

The third bucket would be all other originated loans, which nets to a reasonable 50 basis points. I hope this helps put our non-performing assets into context. And with that, I'll turn the call over to Brian..

Thank you, Rick, and good morning, everyone. As you saw in yesterday's release, we delivered $0.33 earnings per share with return on tangible assets of 87 basis points and return on tangible equity of 8.2%. All of these results compare favorably on a linked quarter and year-over-year basis.

In fact it could be argued that the second quarter was one of the best in our Company's relatively short history. In my following comments, I will touch on the results of the quarter and update our guidance. Led by strong commercial loan growth of 33.7% annualized, the total originated loans outstanding grew 22.7% annualized.

After factoring in the acquired loans, the total loan book grew at an annualized rate of 18.2%. In the first six months, total loans have grown 16% annualized on the strength of the originated book growing 20.3%. We were also very pleased that the new loan pricing has reflected the benefit of recent increases in short-term rates.

For the quarter, the total fundings of $270 million had a weighted-average yield of 4.1% with about two-thirds being variable rates. Recall that at this time last year, we were discussing mid-3% for new loan rates.

For the last six months of 2017, we continue to see good commercial loan demand driving the total originated loan outstandings above 20% growth for the year. Offsetting the originated loan growth is the normal pay downs in the acquired loans plus we expect to realize a few large paid-ups in our 310-30 book.

As a result, we are resetting the full-year total loan growth guidance to 15% to 20%. Turning to deposits, we completed the sale of four banking centers and realized a $2.9 million gain. Adjusting for the sale, total average deposits grew at nice 4.9% annualized.

More importantly, the growth was driven by increasing non-interest bearing demand deposits, as our relationship banking model continues to build our small and mid-sized business client base.

The cost of total deposits was 40 basis points in the second quarter and increased 1 basis point linked quarter and just 5 basis points on a year-over-year basis. We are reiterating our prior guidance of delivering average total deposit growth for the year led by mid single-digit average transaction deposit growth.

While keeping time deposits flat after the reductions for banking center sales. Due to the timing of the banking center sales and the impact on the quarterly averages, we would expect the third quarter averages to be closer to the second quarter.

Fully taxable equivalent net interest income totaled [$83.3] million, increasing $2.3 million, on the strength of growing earning assets and an 11 basis points widening on the fully taxable equivalent net interest margin to 3.55%. We are clearly benefiting from our emphasis over the years on the variable rate pricing in the commercial loan portfolio.

We also benefited from higher levels of 310-30 accretion income, which would calculated the benefit to be approximately 5 basis points on the margin and $500,000 of additional accretion income in the second quarter.

For the second half of 2017, we are not including any increase in short-term rates and are therefore forecasting a fully taxable equivalent net interest margin at the higher end of our prior guidance of 3.4% to 3.5%. We are also forecasting an accelerated reduction in the 310-30 accretion income given the pay downs that we expect.

The accretion income for the third and fourth quarters are targeted at $5.5 million and $4.5 million respectively. Adding a flat to slightly increasing earning asset base and the net interest income is forecasted earning asset base and then net interest income is forecasted to increase slightly from the second quarter strong level.

Rick provided the credit quality overview and our outlook for the rest of the year. Adding in our loan growth guidance, we expect the full-year provision for loan losses to be towards the lower end of our prior guidance of $10 million to $13 million for the year.

Non-interest income totaled $12 million or $9 million excluding the $2.9 million pre-tax gain on the banking center sales. It compares favorably to the $8.7 million recorded in the first quarter.

We reiterate our guidance of mid single-digit growth collectively for banking fees and expect to end the year with total non-interest income in the range of $39 million to $41 million. We continued good trends in non-interest expenses as they totaled $33.4 million, improving from $34.6 million in the first quarter.

The second quarter included Peoples merger related expenses of $298,000 as well as some nice gains in OREO. For the first six months and as we guided, OREO gains have offset the expenses of OREO and problem asset workout.

We reiterate our full-year expense guidance of $136 million including a net zero impact if not better from net OREO and problem asset workout expenses. Additionally, we currently see less OREO gains potential in the third quarter versus some nice pickups in the fourth quarter.

As additional guidance, we will incur integration expenses related to the Peoples acquisition over the next few quarters. We are forecasting the nominal expenses in the third quarter with $3 million after tax in the fourth and $5.6 million after tax in the first quarter of 2018.

You will note that these add up to $8.8 million after tax and are less than the $13 million we shared with the merger announcement. The remaining $4.2 million will be incurred by Peoples prior to the merger closing and are included in the tangible book value targets to be delivered at closing.

Regarding taxes, the tax rates came in consistent with our prior guidance when adjusting for the $548,000 tax benefit realized on previously issued performance-based equity awards. For the last two quarters of 2017, we are expecting an effective tax rate in the range of 20% to 22%.

Of course, this is before any additional tax benefits realized in the coming quarters on previously issued performance-based equity awards. When using the fully taxable equivalent net interest income amounts, our guidance is unchanged for a fully taxable equivalent tax rate in the range of 29% to 31%.

Capital ratios remain strong with $55 million in excess capital at quarter end using a 9% leverage ratio. Tim, that concludes my comments..

Thanks Brian. Well I'm very proud of the collective achievements of all of our teammates as we continue to build a leading community bank franchise. It's not lost on us that we benefit from doing business in attractive markets that continue to perform better than the national averages on virtually every economic metric.

We believe that the combination of strong talent and great markets will continue to translate into growing returns for our investors. Finally, I want to share how pleased I am that the Winter family and their teammates at Peoples chose the partner with NBH. We could not be happier with the prospects for this combination.

Again, thanks for calling in today and for your interest in our Company. And Lisa, I would ask you to please open up the line for questions..

[Operator Instructions] And our first question comes from the line of Chris McGratty from KBW. Your line is open..

Good morning, Chris..

Hey, good morning, everyone. Maybe Rick, I’ll start with you. I wonder if you can give any more contexts on the credit that impacted the result this quarter maybe industry type size or the relationship whether it's leading to a review, but other portfolios, obviously it's a one-off it seems like, but any kind of color would be great..

Yes, Chris, I typically don't discuss individual credits and I'll reiterate the comment I made.

There really is a one-off and pointing to the broader picture, which is I see not only in this past quarter, the special mentions, Chris has classifieds, non-accruals coming down, but those trends continuing in terms of the [indiscernible] will be an inventory of future problems.

So no, I don’t see contagion, and the big picture still looks attractive and as I said and Brian reiterated, we feel very good about where our credit costs will be for the year..

Okay.

But just to be clear, it wasn’t in the energy portfolio was it at commercial and middle market?.

That is correct..

Okay. Maybe if I could on deposit growth and kind of loan-to-deposit ratios kind of going forward looking beyond a couple quarters. Obviously, you guys have remixed the balance sheet quite successfully. I am interested in kind of where you're comfortable and given the industries kind of renewed focus on deposits.

Where you're comfortable taking the loan-to-deposit ratio in the next couple years pro forma for the acquisition? And maybe if you could – Brian share with us some of your assumptions on deposit beta? Thanks..

Sure. A couple pieces to that. Maybe the context of the acquisition is, for a start, that their loan-to-deposit ratio, Peoples loan-to-deposit ratio was in the mid-70s which was similar to ours, so we're creating some liquidity and additional head rooms, which are exciting for us.

We're very comfortable taking our loan-to-deposit ratio up much higher than the 80 that we have and people feel that our banking centers ability to produce deposits as well as the commercial relationship model that we have can produce more deposits. So as deposits are growing that's running with the loan deposit ratio.

And taking that above 90%, 90% plus is fine. On the other side of it you take the investment portfolio which currently runs about 20%. We're very comfortable taking that down 10% to 15%. We haven't really focused on a number, but what you need to liquidity in a little bit of collateral pledging is all we needed.

We see that as more the end state, end state is where we’ll be. And the investment portfolio is running down about $300 million a year at the current run rate, so that kind of gives you some of the feel of the balance sheet dynamics. Now turning to the deposit beta, we consistently modeled that beta in the mid-30%, kind of low-30% all weighted in.

And obviously, we've all seen much less than that and enjoying that in the margin expansion and certainly feel that that's going to be there for the short-term. Our markets have been very reasonable, haven't seen any large breakouts by anybody in particular.

So in energy, look at our 5 basis point increase year-over-year for our total deposit cost versus arguably 75 basis points movement in the short-term rates. Now we are in our [indiscernible] and I'm sure other banks are talking about the acceleration that could happen.

So as we model going forward, it's nice to just kind of in a static way think about that in that 30% range for beta, but there could be a catch up. And so we're certainly making sure that we're prepared for that and making sense of those as we go forward..

Hi, Chris. It's important to look at the math, but it's also important to look at the strategy and tactics. From day one, we've talked about building a Company that doesn't operate with singularly focused lenders.

We have bankers whether they're small business bankers or commercial bankers focused on treasury management, capturing the core operating accounts of our clients, where you find yourself most immediately vulnerable in rising interest rate markets as of course with money market, CDs, the various time instruments.

Holding on and growing those core operating accounts is in my mind the strongest business hedge against that price inflation. And one thing we're particularly excited about is the growth we're seeing in our operating balances with small businesses. That's been a focus that we've talked about. We're seeing results there. We expected to continue.

All of our bankers have balance scorecards. They cannot optimize their compensation without capturing those operating accounts that deposit business with clients. And we believe that's our real key to growing the quality franchise. So that maybe a little more info than you were looking for, but I think that ties the strategy to the math..

Great color. Thank you, both..

[Operator Instructions] Our next question comes from the line of Jeff Rulis from D. A. Your line is open..

Thanks. Good morning..

Hey, good morning..

Hi, Jeff..

Brian, I wanted to clarify the margin a little bit just the 3.55% reported included five basis point benefit from accretion.

What was that in Q1, the accretion benefit?.

I really didn't have any specific pickup in Q1. So you saw – and as you look at our trend Jeff. It's a little unusual for us to have 310-30 income higher in a subsequent quarter.

So as you look at the $6.2 million in total that we record in the second quarter versus the below $6 million in the first quarter and that tells you that we got a little benefit. And it's not just our best estimate right now it’s 5.5% in the third quarter and 4.5% in the fourth quarter and that's an accelerated decrease.

But as I mentioned, we expect some larger payoffs in the 310-30 book..

Okay.

So if I would had just point-to-point, if you had three – the 11 basis points of sequential increase, five basis points of that was on accretion, the other six was sort of a core margin increase?.

Yes and there's a lot going on there as you know the 310-30 – the non 310-30 book expanding 13 basis points. But then it's being fueled by the 310-30 and coming down as well as the investment portfolio reworking.

So the key is that underneath, we're getting that movement in the loan rates that we've built up over the last number of years with a variable rate..

So then the guidance on the 3.4% to 3.5% and saying at the high-end that includes any accretion? So if you're at 3.55% effectively sort of treading and I guess the 5.5% that you identified in Q3.

You're essentially saying the core could be coming in Q3?.

No, no the core is going to be increased, depending on how you define the core for a while, but in our balance sheet, we're always working against at 310-30 coming down and it's hard to replace 70% owners and so there's a little bit of trade and so it's happened that happens through the margin..

Fair enough, okay. And then maybe a broader question, maybe for Tim.

Just on the M&A side, would you be entertaining additional deals at this point or you kind of focused on the closure of peoples and integrating that down the road?.

It's an interesting question Jeff. We're actually seeing an inflow of interesting opportunities – but our focus is on a successful closure and integration of peoples and maintaining our organic growth.

I think we demonstrated with peoples are going to be extremely smart about the kind of partners that we work with in the case of the winter family, they genuinely believed in the long-term play in our Company, essentially investing in our Company and it allowed us to put together a transaction that we felt made great sense for everybody involved.

So that maybe a long way Jeff of saying, I think those opportunities actually come along few and far between..

Okay. Thank you..

[Operator Instructions] Our next question comes from the line of Tim O'Brien from Sandler O'Neill Partners. Your line is open..

Hi, Tim..

Good morning, guys..

Good morning..

One of the numbers that stood out for me in the quarter was the C&I, the commercial originations number that was a pretty remarkable number.

Can you give a little bit of – I don’t know color about the breakdown of those loans? How much were operating lines and could you give a little color on changes in or staticness in utilization rates on operating lines this quarter and kind of how you see those trends proceeding through the end of the year?.

Yes. Tim, Good morning. It’s Rick. Sure, I’ll give you some color. First, I'll just start with the composition overall continuing to be right at that $1.2 million average funding per commercial loan across the Board. And as you'll see is we produced our investor deck and show our relative concentrations and distribution, diversity, very diverse.

In terms of by industry and certainly on the commercial real estate side still saying well within our concentration limits. With respect to utilization, it's fairly flat. Maybe it's slightly higher lines and some slightly higher availability, but not anything material.

It really was driven by new client acquisition and again across a very broad cross-section of client types in industries..

Do you happen to have the utilization rate level at quarter end, Rick?.

Yes. Right at approximately 60% on the C&I lines of credit. And I think we’re at 59% first quarter and about 60% a year-ago, so I don't think it's materially different..

Great color.

And just out of curiosity of that $159 million or so in originations – commercial originations, was there any equipment or other kind of non-variable rate in that?.

No. Not sure, I exactly followed the equipment versus variable. But I think as Brian described it, I think – believe we’re about 70% variable on the pricing. And it really – as Tim said, we're relationship focused.

These are relationship that we take [indiscernible] in the operating business of the Company, so it wouldn't be an equipment financing per se..

And on the variable rate pricing was the vast majority of that tied to LIBOR?.

Yes. That would be true..

And then following on, do you guys have a legacy, any prime legacy where you might get a little bit of margin benefit or support from the late rate hike?.

Not only do with – we continue to strive to not allow our business bankers with our smaller clients to fall into the LIBOR trap, a lot of our small business clients understand prime relate to it better. And often times I find if you're not careful of banker will lead the client to LIBOR versus leaving them at prime, where they're more comfortable.

So it's actually a – really intriguing question, Tim. it’s something that we’re focused on delivering as an important option to our clients, particularly small business clients..

Thanks for answering my questions guys..

You bet..

Our next question comes from the line of Matt Olney from Stephens, Inc. Your line is open..

Hi, Matt..

Hi, thanks. Good morning, guys.

How are you?.

Well, thanks..

Great. Well, you’ve addressed most of my questions. I just had one minor one, and you’ve been talking about getting some recoveries from your credit workout side of the business and it sounds like you've got some loans and markdown low enough and to generate some revenue.

I'm trying to understand what this potential could be? And so where is the remaining balance of your problems loans that could be sold and what types of premiums that you've been receiving on more recent sales?.

Yes, perfect. Thank you for asking. It’s a profit center. We spend a great deal of time talking about.

Rick, you really got a backup and again just talk about even on a macro level, where we are with the remainder of our acquired loan portfolio? Where we are on OREO? And how we think about it, not just in the coming quarter, but through the rest of this year and then beyond and then you can get into some of Matt’s other details questions..

Sure, Matt. So let me start with the acquired problem loans. As at June 30, we’re right at $40 million remaining that's of about $2 billion. As Brian said, we do see some opportunities to bring that number down further in the next quarter or two, might accelerate the 310-30.

I'd also point out, we don’t – we’re not selling loans kind of as a typical matter of workout. We're collecting including pursuing guarantor efficiencies and so on. And that's where we've been able to drive these are accretable yield pickups quarter-after-quarter that obviously helped improve our yields and provide very nice economics.

On the OREO side, we're at roughly $14 billion of remaining acquired problem OREO.

And in those cases, we've been very aggressive at both taking marks in the past, but also in our efforts to position and reward those properties for the gains that you've seen us take and we have a very nice inventory of those, as Brian will be sharing in the coming quarters.

Don't expect much in the third quarter, but fourth quarter we do expect to have some nice pickups..

In fact, I would suggest fourth quarter should be very nice..

Yes..

And do you want to talk about kind of historical returns out of that OREO portfolio or is that something you're comfortable talking about?.

I don't know that I have the percentages Tim, but we've had quarters where we've put several million dollars of gains on in multiple quarters where we've done that. And so I do think on a percentage of OREO, it’s outsized percentage of pickups. I wouldn’t look at the $40 million and say maybe there's 10%. I would be thinking much larger than that..

And just to clarify, it sounds like most of the gains are coming on that $14 million OREO side versus the $40 million acquired problem loans side, is that correct?.

Yes.

What happens is, as you know Matt is the acquired problem loans, you really – you pick up that gain so to speak through the accretable yield that gets rush through and that's why even that accretable yield when Jeff was asking about first quarter versus second quarter, why that accretable yield can tend to be that lumpy right? I do think what’s interesting as we talk about not to confuse matters, but the remaining acquired problem loans of 310-30 pool.

If you look at all of that collectively outside of the organic book is to think about getting to a point where I would say now over the next nine to 12 months will burn through the vast majority of those OREO gains and should see nice pickups, again somewhat lumpy.

But we do view that OREO booked, the way we're working it is nothing, but a profit center. And then what'll be interesting as we work down through the remaining of these acquired loans, I think will be interesting as we will eventually get to a core.

We think we're getting very close to the core portfolio that will just be naturally amortizing and yet maintain a very high yield over the remaining life of that loan. We won't see as much acceleration. We won't see as much lumpiness. It will just be a very attractive annuity while at last.

Anything you would add – is that a fair characterization Brian..

Yes, perfect..

Understood. Okay. Well that's all for me. Thanks for your commentary guys..

All right..

Thank you, Matt. End of Q&A.

Thank you. And 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..

All right. Thank you, Lisa. I want to thank Chris, Jeff, Tim and Matt for their questions this morning. All right on the mark. And thank you all, again your interest in our Company. Have a good day and a good weekend..

And this concludes today's conference call. If you would like to listen to the telephone replay of this call, it will be available beginning in approximately two hours and will run through August 4, 2017 by dialing 855-859-2056 or 404-537-3406 and referencing the conference ID of 92242776.

The earnings release and online replay of this call will also be available on the Company's website on the Investor Relations page. Thank you very much and have a great day. You may now disconnect..

Thank you, Lisa..