Tim Laney – Chairman, President and Chief Executive Officer Brian Lilly – Retiring Chief Financial Officer Aldis Birkans – Incoming Chief Financial Officer Brendan Zahl – Head of Residential Banking Rick Newfield – Chief Risk Management Officer.

Jeff Rulis – D.A. Davidson & Co. Brett Rabatin – Piper Jaffray Brian Zabora – Hovde Group Tim O’Brien – Sandler O’Neill.

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2018 Second Quarter Earnings Call. My name is Amy 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 margin, 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 to and introduce National Bank Holdings Corporation’s Chairman, President and CEO, Mr. Tim Laney. Please go ahead..

Thanks, Amy. We’ll get it right eventually. Good morning and thank you for joining National Bank Holdings 2018 second quarter earnings call.

I have with me our incoming Chief Financial Officer, Aldis Birkans; our retiring Chief Financial Officer, Brian Lilly; our Chief Risk Management Officer, Rick Newfield; and Brendan Zahl, our Head of Residential Banking.

I want to first take the opportunity to thank my teammates across our company for working to attract and expand client relationships across our very strong footprint. It’s exciting to talk about record earnings and record loan production and it’s also fun to talk about growing our transaction deposits, while holding our cost on those deposits flat.

But it’s also important to point out, that we are doing this while maintaining a very diverse and granular portfolio of business. My teammates and I happen to believe that we’re now running solidly on six cylinders of our eight cylinder engine.

Said another way, we believe we still have a lot of runway on both the revenue growth front and the expense management front. Again, I want to thank every teammate in our company for working every day to improve the experience of our clients with our bank.

We’ve built a solid foundation in great markets and the prospects for growth are as great as I’ve ever seen. Brian on that note, I’ll turn the call to you..

Thank you, Tim and good morning everyone. As Tim mentioned, we are very pleased and proud to have earnings per share quarter above our stated goal of $0.50 per share, delivering $0.57 after adjusting for the people’s onetime costs. The record earnings grow record levels for return on tangible assets of 1.33% and return on tangible equity of 13.71%.

We’ve all worked very hard to achieve these results and we are well positioned to keep the positive momentum. With that I’m turning the call over to Aldis to provide commentary on the quarter’s results and our outlook for the rest of the year.

Aldis?.

Thank you, Brian and good morning everyone. Let me jump right into this quarter’s results. With respect the total originated and acquired loans and remember that they are excluding 310-30 loans from this figure they had a strong growth of $152.6 million on a linked quarter basis were 17% annualized.

The second quarter loan growth was driven by a record $351.1 million in loan originations of which $288.9 million or 82% were commercial loans. Our commercial loan originations increased 78% on a linked quarter basis and 50% as compared to commercial loan originations during the second quarter of 2017.

We are also very pleased with the continued success of our small business and SBA teams, which once again set a record for loan originations.

Overall, our new long bookings remain granular and diverse relative to industry sector, commercial real estate, property type and geography as the bank maintain that here and still are self-imposed and concentration limit.

We are also very pleased with the new loan pricing – that the new loan pricing has reflected the benefit of recent increases in short-term rates. The fully taxable equivalent new loan yields came in at 4.9% with a 68% variable. The new loan yields continue to be accretive to originated loan book yield of 4.45%.

Supported by our pipelines and strong local economies we are reiterating the full year loan growth target of 10% to 11% excluding 310-30 balances. We are also confirming our 2018 year end guidance for 310-30 loan balances to be in a range of $70 million to $75 million. Turning to deposits.

Our full average deposits grew at 1.1% annualized rate in the second quarter over the first quarter of 2018. The linked quarter averages were led by a solid 4.7% average transaction deposit growth as our relationship banking model continues to build our small and mid-sized business client base.

The cost of total deposits was 42 basis points and increased just 1 basis point over the link quarter and just 2 basis points over the second quarter of 2017. Competition for deposit is growing and we are starting to see evidence of an increased number of potential clients shopping that are part of the dollars for the highest paid rate.

However, we feel very comfortable with our relationship model and 83% loan-to-deposit ratio allows us to remain patient and grow core deposits without having to reach full rates. We are optimistic about our transaction pipeline outlook for the third quarter but see deposit growth slowing in a light of competitive environment.

We projected grow our transaction deposits in low single digits for the second half of 2018 with time deposits being flat to slightly down. The fully taxable equivalent net interest margin widened 11 basis points to 3.95%, well above our guidance in mid 3.70s.

As a reminder our guidance did not include any interest rate increases or accelerated accretion. And given our asset sensitivity we clearly benefited this quarter due to the early moves in LIBOR and prime rate increases. Net interest margin also benefited 5 basis points from accelerated accretion on acquired loans and 310-30 loans.

Looking forward for the rest of 2018, we are forecasting our fully taxable equivalent net interest margin to be in the low 3.90s with targeted year-end earnings asset levels of around $5.2 billion.

This guidance once again, does not assume any further interest rate increases by the fed, we continue to be well position to benefit from further short-term rate increases. However, the magnitude will depend on the pace of deposit pricing.

Building a defendable long-term margin is a priority for us and we are very careful to balance the cost of funds versus building a long-term core depositor base that can grow and support earning assets. Moving onto credit.

Our past five months continued a positive trend in the second quarter with a classified loan ratio at 1.15%, which is a decrease of 21 basis points from the prior quarter’s 1.36%.

Non-accrual loans this quarter remain stable with non-accrual ratio to total originated and acquired loans at 0.68% and our outlook for asset quality demands favorable into the second half of the year.

Net charge-offs for the second quarter were just 3 basis points annualized and the second quarter’s loan loss provision expense of $1.9 million was driven by the quarter’s loan growth.

Looking ahead as credit environment remains stable, we expect the net charge-offs for the remainder of 2018 to be around 10 basis points annualized each quarter, which is lower than what we had guided before. The provision for loan loss expense for the second half of 2018 is therefore expected to be in the $5 million to $7 million range.

As Rick discussed during our last quarter’s earnings call as part of the asset resolution process, we moved $124 million 310-30 loan, which we acquired back in 2010 with our Hillcrest FDIC acquisition into OREO during the second quarter, which increased this quarter’s total nonperforming asset ratio to 1.58% from 0.96% in Q1.

We have solid value in the underlying collateral and expect a positive resolution. Excluding all OREO transfer from 310-30 loans the non-performing assets ratio was 0.82% at June 30, 2018. Non-interest income totaled $19.6 million, a 9% increase from the prior quarter.

Link quarter fee income was mainly driven by the stronger mortgage banking gains on sales, which increased $0.9 million and bank card fees that increased $0.3 million. The second quarter mortgage loan production volumes are up 39% on a linked quarter basis.

However, the production margin on the residential mortgage originations stayed at compressed March 2018 levels due to the increased price competition in our marketplace.

Based on this we are lowering our gain on sale expectations for the second half of 2018 resulting in a total non-interest income, full year guidance in the range of $73 million to $75 million. The third quarter non-interest income is expected to be consistent with our second quarter and due to seasonality decrease again in the fourth.

Regarding expenses, we are very pleased to report the second quarter total expenses of $46.8 million, a decrease of $8.5 million from the prior quarter. This quarter’s number included $0.4 million in onetime expenses related to the Peoples acquisition, and we believe that substantially all acquisition related costs have been realized at this point.

We are adjusting both the first and second quarter – sorry, when adjusting both the first and second quarter expenses for Peoples acquisition costs the linked quarter expenses decreased $1.3 million as we are realizing efficiencies from the Peoples acquisition.

This quarter’s results also included $0.8 million related to net OERO on problem loan-related expense. Going forward, we are guiding our expenses to be in the $91 million to $93 million range for the second half of 2018.

When adjusted for Peoples acquisition costs incurred during the first half of 2018 this will put our full year expense guidance at $185 million to $187 million. This is lower than our prior guidance driven by the excellent job our teammates have done managing costs and offsetting the fee income loss due to the mortgage banking trends.

The second half of 2018 guidance assumes net zero, OREO and problem loan expense. Although lumpy, we continue to expect OREO gains to offset these expenses for the second half of the year. This quarter’s taxes benefited from $0.8 million in stock compensation related activity. Adjusting for this item, with the result in an effective tax rate of 17.7%.

We project the effective tax rate for the second half of 2018 to be around 18% to 19%. And recall, this excludes the FTE adjustment on interest income. Capital ratios remained strong, the annual book value per share excluding accumulated other comprehensive income was $18.18 as of June 30.

The tangible book value per share now exceeds December 31, 2017 measure, which was just before the Peoples acquisition and a quarter sooner than we had guided. We expect our fully – we expect our average fully diluted shares to be at 31.4 million share count level for the remainder of 2018. Tim, that concludes my comments..

Aldis, you covered a lot of ground on your first earnings call. It’s like Brian set you up to run a marathon on your first run out. But well done and thank you. I’ve asked Brendan Zahl to join us this morning. We’re fortunate to have Brendan leading our Residential Banking division while also serving as a key leader in our Colorado market.

In fact it’s noteworthy that Brendan currently serves as Chairman of the Colorado Bankers Association. Brendan, welcome..

Tim, thank for the introduction, and good morning everyone. I’m Brendan Zahl and I’m excited to have joined the NBH team through the Peoples merger earlier this year.

The opportunity to leverage our experience in residential banking and the strong market presence of the NBH in some of the best markets in the country provide for a great strategic alignment and platform for growth.

Second quarter mortgage originations showed strong growth over the first quarter, increasing $90 million, led by purchase mortgages, which represented 82% of all of our residential loan production for the quarter.

We benefited from strong seasonal purchase activity across our markets, which aligns with our origination model of purchase focused mortgage lending. Make no mistake. We benefit from markets that continue to perform better than the national averages.

On a consolidated basis, we were able to grow purchase volume year-over-year by 2% and help more clients buy homes. And back to Tim’s comment about additional runway for our company, we have further opportunity to deliver our enhanced products and capabilities to more of our clients and prospective clients within our markets.

Nationally, the mortgage market is recognizing lower gains on sale as declines in refinance volumes related to higher interest rates have pushed additional originators into the purchased space.

Consistent with our experience and organizational objectives, we continue to actively manage our expense structures to align with origination volumes and return margins. Our team generated $8.9 million in mortgage banking revenue in the second quarter, which was an increase of nearly $1 million from quarter one.

As mentioned in our last quarterly call, we have introduced portfolio mortgage and home equity line of credit loan opportunities to our clients and sales associates with good initial success and had the strongest quarter in the last 12 months.

These programs also align with our relationship-based banking model and meet our balance sheet and credit risk objectives. We expect continued strength in purchase production in the third quarter with similar levels as in the second quarter. Overall, I’ve been very pleased with the performance and resilience of our teams.

And I’m excited that we are recognizing synergies of putting our two organizations together. Tim, back to you..

Thank you, Brendan, and thank you for your leadership. And I just continue to be blown away by the talent you have on your team. So I am equally as encouraged about our prospects. I want to close today by reminding everyone that while Brian is retiring from his CFO position August 10.

We’re fortunate in that he’s going to remain around as an adviser and teammate through at least, and you note I mentioned at least, the first quarter of next year. I consider Brian to be a founding member of this company. The bottom line is we would not be where we are today without him.

Brian, on behalf of our board and all of your teammates at NBH, I just want to say a big thank you. And on that note, Amy, I’ll ask you to open up the call for any questions..

[Operator Instructions] Your first question today comes from the line of Jeff Rulis of D.A. Davidson & Co. Your line is open..

Good morning..

Thanks. Good morning. Just a question on the margin accretion added 5 basis points this quarter.

Just what was that, sequentially what was the benefit in the first quarter?.

We have about 10 basis points in the first quarter, so it was a little bit less. About $1 million in the first quarter, about $0.5 million this quarter..

Got it. And the low 3.90% guidance for the balance of the year.

Does that include any accretion benefit or excludes?.

That excludes any accretion benefit. That’s been lumpy for us, Jeff. So we’ll take it when it comes but it’s not something we project out in our result..

Yes, no, that’s helpful. And then maybe on the expense line item.

Have all cost savings been achieved from the Peoples acquisition at this point?.

By June 30, we – yes, substantially all the onetimes as well as substantially all of the run rate cost savings. Although, you did hear us guide down our expense versus the first six months. And that’s realizing those synergies. And we’ve not only realized but we had shared with you for the Peoples acquisition, we’ve done better than that..

And to be clear, those savings aren’t simply built on the back of the Peoples integration. But just our teammates conviction around working to be more efficient every day..

Yes, contracts everything. So the expense culture, Jeff..

Got you. And just another clarification. The $185 million to $187 million guidance that excludes the year-to-date merger cost that you’ve….

That’s correct. Yes, that excludes the one-time merger costs..

Jeff, you sound a little down, are you under the weather?.

No. it’s just – maybe it’s the earnings season. I’ll pick up my spirit here. And Brian, congrats on the retirement..

Thank you, Jeff..

Thank you, Jeff..

Your next question today comes from the line of Brett Rabatin of Piper Jaffray. Your line is open..

Hello, Brett..

Hey, guys. Good morning..

Good morning..

Wanted to go back to just the margin guidance and the discussion about seeing some pick up. I mean you’ve done a really great job with the deposit beta and managing the cost of [indiscernible] funds, almost flattish year-over-year.

And so I guess I’m just curious to get a little more color, if you can, on how much of a magnitude you’re expecting or you’re seeing in deposit betas currently? I guess that’s question one..

Well, I’m going to step out there and this is probably one of the reasons Brian’s happy he’s retiring. This is a challenge I’m throwing out to the team. I could not be more excited about the pipeline I’m viewing as we speak for the third quarter. As it relates to the growth of core operating deposits.

I really think we’ve got the potential if we stay focused to have the best core deposit growth quarter in the history of our company in the third quarter. And let’s face it, when you’re growing core operating relationships with small and midsized businesses, they’re simply not as interest-rate sensitive as a lot of the consumer business.

Now having said that, we are at a point while, as Aldis mentioned, we’ve been working a bit of a lag-and-drag game. We’re also sensitive to being competitive and ensuring that particularly our relationship-oriented clients are getting fair interest rates on their interest earning products.

So you will see us marching up those rates, particularly again, I’ll emphasize as it relates to retaining and expanding existing relationships, the place I’m not inclined to go because I just don’t really think there’s a lot of value in it, is down the path of just simply chasing single service high-cost CDs.

I don’t think we’re going to have to do that. I just – I could not be more proud of my teams focus on capturing the full relationship of our clients.

I’ll stop there and Aldis ask you if there is any additional math you or Brian would like to add?.

No. And back to the guidance of 3.90%, it is based on the current rate environment and where LIBOR rates have settled, and that’s our guidance on it. And as Tim mentioned, we will defend our core deposit base and relationships, and if there is a future rate increase, we are set-up to be benefiting from it.

But how much do we benefit, that becomes very difficult as we do expect that competition will increase and we’ll have to be more aggressive on defending our deposits..

But, Brett, just to be clear and this is consistent with what we’ve said, we’re not the pricing leader in our markets, we’re a good counterpuncher. And we have benefited from rational competition in our marketplace and we track it very closely.

And as rates are continuing to move, we’ve seen some movement, which is why Tim spoke to a number of partnerships that we have. But we will be a good counterpuncher and protect the margin in core relationships..

Okay, great. And then wanted to ask about Denver.

If you’re seeing any potential opportunities with all the deal activity in the market? And if you might be looking to hire some folks and try and push the market share in Denver?.

Yes, I thought long and hard about how I would answer this question. I think it’s the right question at the right time with the now sale of CoBiz and Guaranty. Obviously, it creates a unique opportunity for our company. And of course, we’re in the early stages of realizing the potential there.

That’s – it begins, just as you pointed out, over the years we’ve targeted the bankers we would like to have join us from those organizations and they – now it’s that point in the cycle where they’ll have an opportunity to examine their options and hopefully we’ll be successful with some of those folks.

Having said that, I think the acquirers of Guaranty were very smart to retain Mike Hobbs. I think he is one of the best bankers in Colorado and a rational banker, and we don’t mind having them in place. I don’t know that much about Bank of Oklahoma and how things will go with CoBiz.

But look, I will trust that there’ll be strong but rational competitors and we’ll all benefit from doing business in one of the best markets in the United States.

And really, you have to wrap your head around this market is the front range because what we’re seeing is this incredible growth from Colorado Springs through Denver, through Boulder into Greeley and Fort Collins. And it is truly just one market that is almost impossible to wrap your brain around in terms of the potential..

Okay, great. I appreciate the color..

Yes, you bet..

Your next question comes from the line of Brian Zabora of Hovde Group. Your line is open..

Good morning all..

Good morning..

I have a question, just quickly on the OREO transfer that you had.

As far as – do you have a sense on timing on when that may be sold?.

Yes, Brian, this is Rick Newfield. So as you may recall, our OREO book for the last several years has been a profit center. With our net OREO gains more than covering total workout expenses as Aldis mentioned for the second half of this year our expectation. With respect to this OREO derived again from one of our acquired [indiscernible] banks.

Moving this asset OREO was just part of the resolution process and getting to a point where we could ultimately sell the asset. Now we do, we have attractive value, we already have it under contract. And we do expect to sell it this year, the buyer is very strong financially, highly reputable, expect to gain as we wrap up the process.

And again, as Aldis said, while OREO gains will be lumpy we have other assets, that we also have a positive outlook and contracts employees..

Brian, are you and Rick prepared to announce a range of that possible gain? Or is it too early to be talking about that?.

No, it’s too early. I like the upside..

I’ll just say publicly, I’m very excited..

That sounds good. Sounds good. All right. And then just a question on loan pipeline.

How is it compared to last quarter? And could you give us a sense as far as the regions, is it mostly Colorado in the front range? Or how are the other markets there?.

I’ll tell you what, our teams are absolutely performing solidly, if not strongly across every one of our markets right now. And a lot of it frankly ties back to foundational work that’s been laid over the last four or five years we’re just continuing to come into our own. It takes time to earn the trust of prospects.

It takes times, particularly with these mid-sized businesses to earn the opportunity to make the transition to a new bank and we’re seeing it happen for us. And I can tell you, we’ve got the best leadership in each of our markets we’ve had since we began the company and the best group of bankers in each of our markets.

And I’ve already commented on deposit pipeline for the third quarter. I’ll tell you, we’ve entered the third quarter with as strong a loan pipeline as we’ve seen in our history. Now again, our teammates, and I include all of us in this, we have to deliver. But we have wind in our cells.

And Brian and I like to reminisce, by the way, when we were starting this company and talking about hitting $1 billion in loan production a year at a time when we were generating $25 million in the quarter.

And all of you thought we were idiots, so – and we probably are idiots but it sure is satisfying to be delivering well beyond those targets that we set for ourselves in the beginning..

Definitely. And then the loan….

Are you saying, definitely we’re idiots?.

No. Definitely happy to see the progress. And I for one do not think that you guys were ever idiots. I never said that I might not..

Thanks Brian..

And then just on the loan growth, you reiterated your guidance expectations, it sounds like things are strong, are you – any concerns about pay downs? Or what may drive you to the high end of the guidance or maybe above that?.

Brian, this is Rick again. I mean look, we continue to have a more mature loan portfolio so you know pay downs and these sort of permanent financing or some of the CRE is just a natural state. You know we have revolver utilization that oftentimes will drop off a bit in the fourth quarter.

But as Tim has said, our overall pipeline is very diverse and very strong. And so, again, I’ll just reiterate what Tim said in terms of the guidance..

We talk about the granularity and diversity, Rick.

But remind everyone what the size of our average relationship in terms of loans with our clients is?.

Yes. I mean year-to-date, our average commercial loan is averaging funding of just under $1 million. So it is very diverse and granular. I mean you can see the origination activity principally as all this set is around commercial..

And then speak to – since we feature residential banking today, speak to where we’re at on average loan to value and average FICO score on our residential banking book..

Sure. And I’ll speak specifically to that, that we keep in our portfolio because as Brendan said, 82% is purchase money that gets sold typically in the secondary. I mean on a year-to-date basis, our average loan funding is $107,000. Average FICO is 751. And our LTV is around 60%.

So it’s a very high quality, very strong book that we do put in our portfolio..

Thank you..

Thanks for taking my questions and all the color..

You bet. Thank you..

Your next question today comes from the line of Tim O’Brien of Sandler O’Neill. Your line is open..

Good morning, Tim..

Good morning, Tim. Well, not a lot left to ask but just to follow on the OREO.

What kind of property is that that’s in contract, the $24 million?.

Tim, Rick. Look, it’s a very attractive property in the Austin, Texas area, which as you may know is truly one of the fastest-growing metro areas in the country. And it’s – again, we feel very good about where we’re at with it..

Commercial?.

Yes..

Office?.

No, look. I’ve probably provided all the detail honestly but again….

Fair enough..

We’ve tracked it very, very carefully..

And then, are there any headwinds at all, that you’re watchful of and credit or interest rate or something like that, Tim?.

Well, you know, look, I think as it relates to credit, we do something that’s very unique for a bank of our size. We certainly have our own internal loan review team and they are very strong. But for the last two years, we’ve gone an extra step that almost is akin to what the larger banks have to do with, DFAST.

And then we go out to a third-party, many of you would be familiar with the firm Gateway. We use them typically when we’re doing acquisitions to examine the books of other potential targets and we’ve actually been using them to do an internal stress test on our own loan portfolio.

I can tell you that the work they do, third-party objective gives me a lot of confidence, not only in where the book stands today and where are our reserves are, but furthermore, how well the book would perform in different scenarios of a downturn.

So I don’t know how to better answer your question on that front than this year, that information, which I don’t really think we’ve shared before. In terms of other headwinds, look, we worry every day. We worry about a lot of things. We worry about, more than anything else, irrational pricing in the marketplace.

But that’s why we stay very focused on our client relationships versus single service products. We will do everything we have to do to, to protect those relationships because we’re looking at the value of that relationship over time, not just on a quarter-to-quarter basis.

So I cover credit – in terms of interest rates, look, I think we’ve got to realize in terms of where we’re at in the economy, these are some of the – still some of the lowest interest rates for business that we’ve seen in our lifetime, so I think we’ve got room for interest rates to continue to grow without creating any stress.

And we’ve got a portfolio that’s built to take advantage of any additional rising rates..

Thanks for the color. I appreciate it. Congrats on the quarter..

Yes. Thank you, Tim..

Your next question today comes from the line of Chris McGratty of Keefe, Bruyette & Woods. Your line is open..

Hi, Chris.

Chris?.

Chris, are you unmuted? All right we may have lost Chris. Chris are you there? All right. At this time I’m showing there are no further questions in queue. I will turn the call back to Mr. Laney for his closing remarks..

Amy, I’ll just say, again, thanks to all of my teammates for taking care of our clients and help us continue to grow in strong markets. Thank everyone for joining today and your interest and we’ll continue to work hard to create nice returns for you. Have a good day..

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 2, 2018, by dialing (855) 859-2056 or (404) 537-3406 and referencing the conference ID of 7153207.

The earnings release and an 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..