Tim Laney - Chairman, President and Chief Executive Officer Aldis Birkans - CFO Rick Newfield - Chief Risk Management Officer.

Jeff Rulis - D.A. Davidson Chris McGratty - KBW Tim O’Brien - Sandler O’Neill Brandon Steverson - Stephens Brian Zabora - Hovde.

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2018 Third Quarter Earnings Call. My name is Emily, 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 and introduce National Bank Holdings Corporation’s Chairman, President and CEO, Mr. Tim Laney..

Thanks Emily. Good morning and thank you for joining National Bank Holdings 2018 third quarter earnings call. I have with me this morning our Chief Financial Officer, Aldis Birkans; and Rick Newfield; our Chief Risk Management Officer.

And I want to begin by thanking my teammates for their continued focus on the disciplined execution of our relationship management model. While it's a lot of fun to talk about our record earnings of $0.48 per share, I am even more excited by our underlying drivers of growth.

We delivered solid loan growth across a diversified across such an industries and our 10.3% annualized growth in non-interest-bearing deposits was a direct result of focused relationship expansion with our clients. We have every reason to believe that this momentum will carry into the fourth quarter and next year.

We continue to build a very granular and diversified loan portfolio and we believe that this coupled with solid underwriting is the most prudent approach to building a strong base of business. Our team did a nice job with expense management, but we all know we can do better and I believe we will.

We’re a young company and we’re determined to get better on every front so more to come and now I’ll throw it to Aldis..

Thank you, Tim and good morning everyone. As Tim pointed out we are very pleased with our third quarter results, as well as the momentum our team has built going into the final stretch of 2018. For the third quarter we reported a record earnings per share of $0.58 per fully diluted share and a record return on tangible assets of 1.35%.

Our third quarter originated and acquired loan balances which excludes 310-30 loans grew at a solid 9.3% annualized base as compared to the prior quarter.

The quarter's loan growth was driven by $274.6 million in new loan fundings which is a 51.5% increase over the third quarter of 2017 and puts our trailing 12-month loan originations at $1.1 billion.

The fully taxable equivalent in new loan yields came in at 5.1% and the new loan yields continue to be accretive to our originated loan book yield of 4.5%. This quarter 48% of the new loan fundings were variable-rate loans. In the third quarter we continue to see strong commercial loan growth with our bankers expanding and adding new relationships.

Commercial loan production was $188.2 million and represents an attractive 68.5% of the total fundings and increased our originated and acquired commercial loan balances by $124.8 million on a linked quarter basis were 21.6% annualized.

We have a strong loan pipeline for the fourth quarter driven by great team of bankers across our footprint and given strong local economies we expect to achieve our prior guidance for the full-year growth of 10% to 11% excluding 310-30 loans. The 310-30 balances are projected to end the year at around the $70 million mark.

Turning to deposits, our total average transaction deposits grew 0.2% annualized over the second quarter of 2018. More important, we grew our non-interest checking account balances 10.3% annualized over the prior quarter and 25.4% over the third quarter of 2017. We feel very good about our momentum in non-intersecting checking deposit growth.

We are also very pleased with our third quarter cost of deposits increase of just five basis points over the third quarter of 2017.

In general, our markets have continued to exhibit rational deposit pricing and our relationship-based banking model has allowed us to focus on capturing full client relationships as exhibited by the non-interest-bearing checking account growth.

For the rest of the year, we are forecasting growth in our transaction deposits in the low single digits with time deposits flat to slightly down. This is consistent with our prior guidance. The fully taxable equivalent net interest margin widened one basis point to 3.96% on a linked quarter basis.

Both the second and third quarters benefited from accelerated accretion income on early paydowns of acquired loans and 310-30 loans by five and three basis points respectively. Adjusting for these items, the underlying fully taxable equivalent net interest margin widened three basis points.

For the fourth quarter, we are forecasting our fully taxable equivalent net interest margin to be in the area of 3.95% which is a few basis point expansion from the second quarter after adjusting for the accelerated accretion benefit. As usual, this guidance does not assume any further interest rate increases by the Fed.

Furthermore we are forecasting 310-30 loan accretion income of $3.8 million or a decrease of $1 million to the third quarter. This decrease will be more than offset by a higher yields and originated loans and low deposit betas.

As always 310-30 accretion estimate can be higher due to the accelerated accretion income or lower for changes in the estimated cash flow timing. Consistent with our prior guidance we’re projecting our earnings assets to end the year at $5.2 billion. Moving on to credit, our loan portfolio has been exhibiting strong performance.

To that end our nonaccrual loans ratio improved four basis points linked quarter to 0.64%. Furthermore, during the third quarter we realized one large $1.1 million recovery on a previously charged off energy loan resulting in an annualized net recoveries on the originated and acquired loan book of eight basis points.

Excluding this recovery, the underlying net charge-offs for the quarter would have been only three basis points. This quarter's loan loss provision expense of $0.8 million was driven by the quarter's strong originated loan book growth partially offset by the quarter's net recoveries.

With respect to the fourth quarter of 2018, we expect provision expense to continue to cover our originated loan book growth at about 1% coverage, as well as expected net charge-offs of about 10 basis points annualized. Net interest income totaled $18.1 million and decreased $1.5 million from the prior quarter.

The linked quarter fee income decrease was primarily driven by lower mortgage banking gains on loan sold which decreased $1.1 million. This quarter's total mortgage production volume was down 4.6%. Clearly mortgage gains on sale have been impacted by lower volumes due to high rates and the industry margin compression.

However, we feel good that key driver which is purchase mortgages continues to represent 84% of our total mortgage volume. In fact, the third quarter purchase mortgage production grew 6.5% year-over-year on a pro forma basis. It is also important to note that we expect to manage any decline in mortgage banking gains with reduction in expenses.

Adjusting for the usual fourth quarter seasonality and given the lower level of mortgage banking production, we are forecasting our fourth quarter non-interest income to be in a $16 million to $17 million range.

We are very pleased to report a decrease of $2.3 million in this quarter’s expenses resulting in a third quarters total expense of $44.4 million. This quarter’s expense is benefited from a full quarter of efficiencies from the Peoples acquisition, lower mortgage banking expenses, as well as some nonrecurring accrual adjustments.

We are forecasting the fourth quarter expense to come in at around the $45 million level. Adjusted for Peoples acquisition costs incurred during the first half of 2018 this would put our full-year expenses in the range of $183 million to $184 million.

This is much better than our guidance provided in January and better than our guidance from the prior quarter. Our expense guidance excludes any future OREO gains which continue to be lumpy quarter to quarter. We had executed contracts that will result in nice gains which are expected to close in the fourth quarter.

However, we would not be surprised to see some of those OREO gains pushed into next year. This quarter’s effective tax rate was 19.3% and we projected fourth quarter’s effective tax rate to be around 19% as well. As always this projected rate excludes the FTE adjustment on interest income.

And I’ll just close by saying that we feel good about our momentum going in the fourth quarter and we believe we will carry that momentum into 2019. Tim, that concludes my comments..

Thanks Aldis. And I'll close simply by saying that we feel good about the excess capital that we’re building through retained earnings while also generating almost a 13.5% return on tangible common equity. To that end it's our intention to take a recommendation to our Board for dividend increase in early November.

We like the rhythm of moving to a semiannual review of our dividend and our November move will be consistent with that. On that point, Emily I'll ask you to open up the line for questions..

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

Yes, just I guess following up on the deposit cost side the non-time deposit costs that increase accelerated a little bit in the quarter.

Do you think that was a bit of a one quarter catch-up or is that the piece of increase that you see going forward?.

Yes, look, first of all, it might hit just 5 basis point increase over the full year really implies 5% beta on that component. So we feel very good about the cost to deposits and ability to manage our relationships.

The rate environment has moved up so we do see some of that moving into here fourth quarter but the guidance on the margin include some of that migration. So we do feel good about where we are at and managing the profitability of the balance sheet..

And Jeff, it might be helpful again just to talk about how we've built the Company and what we focus on. If you think about where I started when we were building this Company, I had the opportunity to probably spend as much time looking at troubled and filled banks in the country as anyone.

And there were two common denominators that were consistent when looking at these banks. These won't surprise you or any other analysts on the line. One was an over concentration in one particular asset or loan class. Last time that was largely CRE of course.

And the other real issue was a focus on reliance on non-relationship deposits, typically time deposits and money that would move in a heartbeat.

Our focus and what we're excited about is this real powerful model that we're executing everyday in getting better at every day in attracting the full relationship of our clients, where you will see us move in terms of beta, we'll be not out there running high or expensive money markets or high inexpensive CD's.

But where it's part of a relationship and we need to increase rates to be fair and to take care of existing clients, we feel perfectly comfortable doing that.

But just as I said coming into the third quarter when we were covering the second and I predicted a strong growth in non-interest bearing deposits, I'll tell you I feel just as good going into the fourth quarter and for that matter as we look ahead with our treasury management activity even into the first quarter of next year..

Your funding cost have certainly been low just as a sequential change in just check in. So thanks for that..

No, it’s a good question. Thank you..

I wanted to confirm that there were zero merger costs in the third quarter, is that correct?.

That's basically correct, yes..

And thanks for the guidance on kind of through the year end on expenses.

Any early thoughts on 2019 from an expense run rate if you're kind of in that 183 to 184 for this year?.

Yes, it's momentarily but we're going through our planning process right now. So I'm not going to guide on this necessarily where we going to be but I can tell you that we do manage and look at our efficiency ratio right and adjusted for the mortgage business which does add about two percentage points to the efficiency ratio.

Our goal remains to get that at 60 or below. And we're going do it..

And that below by the end of 2019?.

We're excited about what we can do in 2019 but we'll get to 2019 guidance as we enter into next year..

And our next question comes from the line of Chris McGratty from KBW. Your line is open..

Just a quick question, Tim on your capital comments. You talked about the dividend but obviously bank stocks have broadly have been pretty weak.

Can you just remind us if the authorization you previously had is still good and kind of thoughts about levels where you might come in and support the stock?.

This kind of drop in bank stock prices has almost made me eat my words in terms of saying, buybacks are off the table. I guess it's a reminder that you just never say never. Because - I'll be very clear about our math and methodology on buybacks.

We approach acquiring our own stock no differently than we would approach an acquisition of another institution. Said another way, I'm going to look at the tangible book dilution associated with our buybacks and I'm going to ask myself how quickly can I earn that back based on our knowledge of the growth in our earnings.

And we've certainly proven in the past that we have discipline around executing that model. So we have a price that's not a price that I'm going to share with the market but you better believe that any use of capital whether it's with an outside acquisition or the acquisition of our own shares will come with a discipline..

Do you have an authorization out there still or has that expired?.

No, we do have some left over in the previous authorization but given that it's been a while since we bought back stock. If there was a new view we would certainly discuss that with the Board..

And that's consistent with what I've referenced earlier in terms of early November meeting which is right around the corner..

Okay.

So fair to assume both will be discussed?.

Look, in this crazy mark - just given where we're at, I would say the reality of it is there's no better acquisition we could make than of our own stock because there's no company we're ever going to know better. We're very big on where the companies at, I'll say this. I still think we're only running on six of eight cylinders.

That's only because we're a young company. I actually like that because that just means we can only get better. So as a practical matter knowing what this Company can still do, I would love to be in a position to be able to buy more shares. But again, we're going to be opportunistic..

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

Tim, I think it was you that told me never say never on buybacks. So, you were right. Who knew the market would do this..

I'm glad that is an active discussion in your view going forward. That's a good thing. Every bank should think about that and talk about that and consider it.

Quick question follow-up for all this you mentioned a couple of one time on non-recurring expense items that were positive this quarter, did I hear that correctly and if so could you give me a little color there?.

Yes, it's about a $0.9 million this quarter benefited from the non-recurring accrual peoples contract clean up items..

So, and that came out of comp cost obviously?.

Across multiple line items but it has $0.9 million..

And then did you guys say Rick's on the line too?.

Yes, he's the third musketeer..

Could you give a little color just about - I don't know, the credit landscape anymore - how's housing doing in your markets, it's tougher on the west coast we're hearing that a lot about that anecdotally and showing up in some numbers.

What are your views there and is that anything that could potentially affect the bank, if so how?.

Sure, Tim. Look, I think as you know is in the past quarters and really since day one, we've been very focused on really two principles. One is, managing our concentrations, making sure to diversify.

And then the second is underwriting based on long-term historical not sort of swinging for the fences when the times are very good or be in a position where we have to do a significant change or pull back. As Tim said, we feel - in all this we feel very good about the overall composition of our loans, the diversification.

Our average commercial loan funding this year has been under $1 million at about $930,000 and trended lower particularly as we've driven our business banking activities which Tim has mentioned in the past. You'll see our concentrations in both CRE and residential as it decreased this year.

And I will tell you that when I look at our residential mortgage originations for this past quarter that we hold in our portfolio, very high quality. Average FICO is 751, loan-to-value under 60% and the average loan size is 160,000 in terms of what we brought in our portfolio.

So, look, of course we monitor those kind of factors like housing costs which continue to increase and looking at certain sectors. But we're staying the course and being very, very prudent.

And if you talk about the markets we're in general, and you were looking for issues I would tell you that the front range of Colorado one of the biggest issues is availability of first time loans. That's just simply a supply issue. We think that could ultimately affect the growth in the market.

There are a couple of issues on the ballot that could also potentially affect the front range and one in particular with fundamentally eliminate any energy business remaining energy business or much of the remaining energy business in Colorado.

We’re not in that space as you know we exited our exposure in energy, but I think it will be a - something to really watch if in fact I believe it’s the ballot 112 is a past. In Kansas City, Overland Park that market and is to be a steady as she goes singles and doubles kind of a baseball player equivalent just couldn't be more pleased there.

We’re getting more traction in our Texas and Austin markets and frankly we’re just fortunate to be when all is said and done and very good markets across our company..

Thanks for the color there and then last question on your thinking on M&A and prospects with what's happened with the sector and valuations and stuff.

Does that affect your thinking in terms of deal opportunities obviously your currencies been affected as well, but do you think we might see more deals or fewer deals here with and see a reset down and pricing on deals?.

Tim that’s a great question and I'm not sure we're ready to answer it. This price shift has been moving so quickly I think it's fair to say we continue not unlike the way we approach Peoples. We continue to maintain some very long-term discussions with some perspective sellers, but as we’re going to be very disappointed in how we construct a deal.

And frankly what we’re going to be primarily focused on our privately held institutions and what they've got to do is come to the table willing to be a partner understanding that we’re going to be looking for on a crossover basis a short tangible book dilution earn back and a structure that will benefit Tim as holders of our shares..

And our last question comes from the line of Matt Olney from Stephens. Your line is open..

Good morning, Tim, this is Brandon Steverson on for Matt this morning..

Well you upgraded..

I just wanted to circle back really quick on the mortgage metrics I think you gave a couple.

Do you have handy your gain on sale margin this quarter versus last quarter and then the originations in the third quarter in the mortgage business?.

Yes, the originations were about $305 million that's all in that's about what we held on portfolio and what we have sold. In terms of mortgage gains on sale, we don't necessarily disclose that, but when you consider in the fees that you can collect along the way.

In the first half of the year, we were about 3%, we have dipped some below 3% at this point because of the margin compression I talked about..

And I think it's worth noting that the way we look at our residential mortgage business as we monitor the profitability of that business week-by-week, month-by-month. But ultimately we really do have to as you appreciate and everyone on this line appreciates.

You have to look at what kind of returns we’re going to realize from that business over the course of a full calendar year. Spring going into early summer is when we make hay in that business. We love to break - we always breakeven or make money in the other months that surround that selling season.

But know that the team follows the profitability in that business with incredible focus and we know where we stand week in and week out..

And then just one more from me on the acquired loans, the runoff that we’re seeing quarter-to-quarter it looks like it’s been between 50 million and 60 million over the past couple of quarters.

Is that a reasonable expectation to expect going forward it's between that 50 million and 60 million level?.

Yes, it's certainly looking here in the fourth quarter, it looks to that it’s going to repeat itself. Again we don't give necessarily guidance for 2019 but I do feel like that portfolio is going to slow down in terms of that run off into next year..

Just not that much left..

Understood. Thanks a lot for taking my questions guys..

Emily, anyone else?.

Yes, we do have one more question from Brian Zabora from Hovde. Your line is open..

Just a question on the expense side. In the past you've talked about trying to match OREO gains like a work out cost.

I think you highlighted there could be some sizeable gains in the quarter you are coming up and then some may leak into the first quarter of 2019, but as again we’ll have to match up those this year as far as those two categories?.

Yes, I mean year-to-date we are $1.4 million net expense on those line items. The gains that we have on the contract for the fourth quarter would at least more than offset that cost.

Now, I can let Rick to jump in on timing of those contracts but what we found out there is logistically should be happy to go through and it could push into the first quarter..

I mean, Brian to your point and maybe just expand a little bit on all these comments. We said this before, we continue to view overall OREO as a profit center.

We - in case anyone is new, this was all acquired OREO through bank acquisition which we took deep discounts on at the time of acquisition and are very pleased with our track record through our special assets workout team.

Timing is often while we have a buyer that's committed, sometimes there are other factors that can present themselves in delay some of these but again all this is point, we are in a position to more than close the gap in terms of the expenses in 2018.

But some could certainly run into 2019 and beyond those in our contract we have some other opportunities that we'll continue to pursue..

And I still believe based on everything that I'm saying that net, net we'll be seeing gains coming out of the sale of that warrior. I'm talking about gains above our carried expense. So I still feel very good about the economic returns as Rick just mentioned coming out of that profit center..

And I'm showing, we have no further questions at this time. Thank you and that is all the time we have for questions. I'll now turn the call back to Mr. Laney for his closing remarks..

Yes, I'll just simply say, thanks for joining this morning. As I said earlier, I'm very excited about the momentum we carry here into the fourth quarter.

And frankly the momentum we carry into 2019, I could not be more proud of how my teammates are working to execute our relationship management model and the benefits we're all realizing from growing and expanding those client relationships. So, again, thank you and 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, November 1st 2018, by dialing 855-859-2056 or 404-537-3406 and referencing the conference ID of 687-0724.

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