Good morning, everyone, and welcome to the National Bank Holdings Corporation 2017 Fourth Quarter Earnings Conference Call. My name is Krista, and I will be your conference operator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session following the presentation. And 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 loan 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. Security 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. You may begin.

Thanks, Krista. Good morning. And thank you for joining National Bank Holdings fourth quarter and fiscal year-end 2017 earnings call. I have with me our Chief Financial Officer, Brian Lilly; and Rick Newfield, our Chief Risk Management Officer. Our team-mates delivered total loan growth for the year of 11.1%. We feel good about our loan growth, particularly in light of the strict policy standards we hold ourselves to that prevent over concentration in any particular sector or sub-sector. Further, as Brian will detail later, originated loan growth was even stronger after adjusting for specific targeted reductions. Perhaps no better indicator of the success of our client relationship manager strategy is our low-cost transaction deposits were also growing at a double-digit rate during 2017 as we captured the operating accounts of our clients. Our bank's credit metrics improved in virtually every category and we expect these positive trends to continue. The income grew nicely year-over-year and we expect to continue to improve on this front. Finally, we continued our trend of reducing operating expenses, while at the same time, investing in initiatives that we believe will help us deliver attractive returns in the future. Rick, I'll turn the call over to you to provide an update on risk management.

Thank you, Tim, and good morning, everyone. Let me start by discussing overall credit metrics and trends during our fourth quarter and for the full year. Our non 310-30 loan portfolio asset quality metrics showed improving trends throughout the year. Classified loans decreased by 44% from year-end 2016 to year-end 2017. Non-accrual loans decreased by 32% during the same period with the ratio to total non 310-30 loans improving from 1.13% at December 31, 2016 to 0.69% as of December 31, 2017. Full year net charge-offs at 38 basis points were substantially improved from 85 basis points in 2016, and excluding energy losses, net charge-offs for the year were 12 basis points, in line with 12 basis points incurred in 2015 and 10 basis points incurred in 2016. I'll also note that nonperforming assets improved from 1.61% at year-end 2016 to 0.99% at year-end 2017. With respect to energy, this portfolio is now less than 2% of total loans and a portfolio outside of 1 remaining problem loan continues to be stable. While I'm disappointed we didn't fully resolve that 1 energy non-accrual loan and a charge-off on that loan drove our provision expense higher than planned, I believe we are now positioned to resolve that loan. Total loan growth for 2017 was 11.1%, driven principally by commercial and industrial loan growth of 28% from December 31, 2016. Fourth quarter loan growth was an annualized 7.4%, led by commercial and industrial lending as well. As Tim pointed out, our loan growth remains within our self-imposed concentration limits. Non-owner occupied commercial real estate ended the year at only 111% of our company's risk-based capital and only 17.5% of total loans. All specific property types remain below 5% of total loans with multifamily remaining below 1% of total loans. With respect to commercial and industrial, we remain well diversified across industry sectors with most industry concentrations at 5% or less of total loans, and all concentration levels were well below our self-imposed limits. I'll further note that with the Peoples' loan portfolio added, we'll remain well within our concentration limits, and we will continue to have a well-diversified loan portfolio. Our outlook for asset quality is favorable as we begin 2018, given the much lower levels of classified loans, non-accrual loans and total nonperforming assets, as I've previously covered. I expect our provision expense in 2018 to cover net loan growth at about 1.2% of the net increases and balances with net charge-offs for the year in the 15 to 20 basis point range. I'll now turn the call over to Brian.

Thank you, Rick, and good morning, everyone. There's a lot to like in the quarter and I will touch on the highlights with my comments. In addition, I will share a guidance for 2018, which gets even more interesting with the addition of Peoples Bank on January 1. I have to admit that it is a lot of fun adding so many clients with hundreds of millions in loans and deposits on the first day of the new year. As you saw in yesterday's release, we reported a net loss of $0.37 per share. These results included a $0.67 non-cash charge related to the deferred tax re-measurement. $0.05 of onetime is related to our Peoples acquisition and $0.01 related to the $1,000 bonus for our associates. Adjusting for these items shows continued momentum with $0.36 earnings per share and 88 basis point return on average tangible assets and a return on average tangible equity of 8.41%. As I cover the 2018 guidance, it is important to keep in mind that our 2018 economic assumptions include the continued out performance of our local markets when compared to the national averages. With regard to interest rates, the current consensus is for 3 25 basis point rate hikes in the next 12 months. Given our asset-sensitive balance sheet, we would benefit nicely. However, reflecting a level of conservatism in our forecasting, we have not included any rate increases in the guidance. Starting with loans, we realized quarterly growth of 7.4% annualized on our total $3.2 billion loan portfolio with full year loan growth, 11.1%. We did incur higher-than-normal payoffs in the fourth quarter, but overcame this with strong loan fundings of $232 million. Excluding the 310-30 in energy loans, both of which are in run-off mode, the full year growth rate was very…

Brian, thanks for covering so much ground for us this morning. We closed out 2017 with solid momentum on virtually all fronts. We remain focused on having our young company deliver a double-digit return on tangible common equity, while also delivering better than a 1% return on assets. We could not be more pleased with the closing of Peoples Bank acquisition on January 1 of this year. The Winter Family, the former owner of Peoples Bank, could not be more gracious or more supportive. The culture of our 2 companies are complementary, and we are adding some great talent to our team. Now if you can't tell, we are incredibly optimistic about the returns we expect to realize from this combination. Finally, I want to thank all of my team-mates for their contributions in 2017, and perhaps more important for committing to deliver even stronger results in 2018. Krista, those are our opening comments. We would ask you to open up the line for any questions.

Certainly. [Operator Instructions] Your first question comes from the line of Chris McGratty from KBW. Please go ahead. Your line is open.

Hi, Chris. Good morning.

Hey, good morning, everybody. Brian, just maybe start with you. I just had a clarification question on the expense guide. The $189 million to $192 million, is that inclusive of the charges? Or is that an operating number?

That's - it's an operating number. And I only paused a little bit because, as you know, we're converting here in the first quarter. So we're carrying a full load of Peoples expenses for most of the first quarter before we realize the cost saves in the back half of the year. But the $189 million to $192 million would be that operating in addition to $7 million to $8 million of one-times in the first quarter.

Okay. So if I'm not modeling the $7 million to $8 million, it's the $189 million to $192 million, correct. Can you remind me - while I have you on rate sensitivity, I think your guide assumes nothing for rates, but could you remind us kind of the ballpark estimate for each 25 that you might get?

Sure, sure. Look, we've talked about that and thought about it too, but you know the risk in that. So let me be very specific within understand the variability that could be. We look at 25 basis points adding $0.04 a share, but there is a lot of assumptions in that, and we certainly feel comfortable with the interest income side moving as we have just about half of our loan portfolio in variable loans that benefit immediately. But the wildcard has been and will be the deposit betas. Our deposit beta over the last year was 75 basis points. Arguably just on the interest-bearing transaction deposits, It was around 10 of that 75. We always model as we look forward in a normal time in that 40%, 45% for those interest-bearing transaction deposits, but we've been realizing and benefiting from much less of that. And quite frankly, as we look at our marketplaces and our competitor makeup, it feels like it will be even better than that. So the $0.04 that I mentioned has the possibility of being better, but at some time here, it will be a little bit of a whip back that will increase deposits made a little faster. So that's why we didn't bring anything into our guidance.

No, that's great. Thank you for that. Maybe just one more on capital. I think you laid out the regulatory ratios pro forma. But by my math, your tangible common equity is still going to be, for example, 10%. Maybe, Tim, for you, how are you thinking especially with taxes now part of the equation about returning more capital to shareholders? You guys have already stated buybacks in the past, but dividends and potential future acquisitions.

We still - we feel very good about the opportunity to continue to support a strong dividend for our investors, and that is really a key priority for management and the board. I will tell you that we also are experiencing a pretty strong level of interest from potential sellers of other banks. And so I certainly wouldn't take M&A off the table as another option for continuing to build our company. And Chris, you've followed us for some time now, and I believe most, if not all, of the analysts on the line would agree with us, we will continue to be very disciplined with any acquisition, number one, it needs to be a strong fit strategically; number two, it needs to be something that will create certainly a short term win for the sellers. But more important, we are looking for sellers like the Winter Family that are looking to take a longer-term ride and benefit from the growth of the combined companies in our operations. Speaking of strategic fit, just as a reminder, the Peoples acquisition allowed us to grow in the front range of Colorado, adding Colorado Springs, a market we're incredibly excited about. It really fills out the front range of Colorado for us and they have a great team down there and it's going to really allow us to grow there like we couldn't have before. And the same is true with the Peoples contributions and Overland Park and that expansion of the Kansas City market as well as a couple of nice university cities that will now be run. So I know that's maybe more - that's long winded, Chris, and more than you may have been asking for, but hopefully, that answers your question.

I appreciate it. Thanks a lot.

Yeah, you bet. Thank you, Chris.

Your next question comes from the line of Jeff Rulis from D.A. Davidson. Please go ahead. Your line is open.

Hi, Jeff.

Hey, guys. This is actually Jeff Pusage [ph] on for Jeff Rulis this morning. Yes. So yes, just wanted to touch on - you guys had a strong loan growth for the quarter. I know you mentioned, it was C&I and construction based, but I was just hoping you could give a little more color on that kind of what you're seeing in those areas? And then possibly, if you could touch on outlook for 2018 organic loan growth, especially, now with the Peoples deal being completed. Just kind of want to see your thoughts on that outlook there.

Yes, I'm glad you asked the question the way you did, because I'll clarify it. If construction based was mentioned, that was an error. This was really driven by small and medium-size businesses. And when we tend to talk about commercial and industrial, I think a lot of people think about larger middle-market companies, but what excites me most is that the vast majority of our growth that we're realizing is really from small and medium-size businesses in the markets where we do business. That - I'll also mention is why we feel really good about what's happening on the deposit side of our book. We continue to pick up through our relationship-centered strategy, these operating accounts of these businesses. We know they're less interest-rate sensitive. These are their core operating accounts, and we are incredibly focused on serving the treasury and cash management needs of those companies. And I would tell you that we can put our treasury management teams up against the Wells Fargos of the world, the bigger regionals of the world and can deliver better service and equal capabilities day in and day out, and we are incredibly focused on growing that side of our business. Now with respect to 2018 and how we think of growth, I really ask Brian to take responsibility for all of our guidance. So Brian, I don't want to get out over my skis. Is there any additional color you want to add?

Just to make sure that we're on the same page, construction has not been a focus of ours, just to Tim's point. But I mean at times, what we gave was 10% to 11% for that portfolio, excluding 310-30. Now as to break it down, and you talk about the originated portfolio that a lot of people talk about on the non-purchase, we still have a very strong number out there in the mid-teens, and - at 14%, 15%. So we've stepped up, with us, our teams to continue the momentum that they built off for the 16.3% we did last year. And certainly, in the first year of an acquisition, we're not as aggressive assuming that and hope to be our modeling assumptions that had some great returns for Peoples.

Awesome. Great. Appreciate the color there. And then just one other kind of clarifying question as far as expenses and the expense run rate you guys are seeing now that the deal's been completed. I know you mentioned most of the cost will be upfront in first quarter here, but I was just wondering if you foresee any additional costs in - later in the second half or anything that might kind of trickle after the first quarter?

There might be a little bit in the second quarter, but by the time we get to the third and fourth quarter, all of our actions and contracts and everything that you go through will be complete. The vast majority will be done here in the first quarter.

I would just add, as you work to model that true operating run rate on expenses, all that anyone needs to do is look at our trend over the life of this company, where we started with expenses, where we are today. And just like we said last year, we'll say again this year, our goal is to beat our targets on the improvement of our operating leverage. We think we've given very reasonable guidance on the expenses that includes any investments we are making in our people, in our distribution, in our products, in our services, but we will hold ourselves to doing our very best to beat that guidance.

Awesome. Thanks for the time. And congrats on the quarter. I'll step in the queue.

Thanks so much for your questions.

Your next question comes from the line of Matt Olney from Stevens. Please go ahead. Your line is open.

Hi, Matt.

Hey. Good morning, Tim, Brian, Rick. How are you guys?

Well. Thank you. Happy New Year.

Yeah, likewise. Thank you. Wanted to start on core loan yields. It looked like the core loan yields did slip a little bit in the fourth quarter. Any color behind that?

Yes. So what you would be referring to is the non 310-30 disclosure that we put in our net interest margin table, which narrowed 5 basis points from 4.25% to 4.20% in the quarter. As you broke it down - we actually included a little footnote at the bottom down there where you see the originated book. It's pretty flat, although it did narrow just 2 basis points from 4.15% to 4.13%. Really what moves that number is we still have a number of purchased loans that are accounted for under what's called 141(R) that had discounts at the beginning that are accrued in. But when they pay early, we accelerate that. In the third quarter, we picked up 3, 4 basis points in accelerated accretion income on the 141(R) purchases and that's just the nature of the GAAP accounting. So we feel real good about the incremental yield that we're getting with the strong variable nature at 4.2% being above that originated book of 4.1%. And know that over time, that certainly benefits us as we go forward.

Okay. Thanks for that Brian. As far as all the guidance is working through it, it looks like you're implying that the securities balance continues to shrink in 2018 as it has in the last few quarters. Am I interpreting that correctly?

As we look at it, there is a chance that, that will be pretty for us in 2018. We are actively just balancing the balance sheet with the strength of deposits and the loan flows. We don't want to get too far long term out there in the investment portfolio if things we might add. But as rates have been increasing, they have been making sense for us to add a little there, so I wouldn't be surprised to see it grow a little bit, but it's more a function of deposit and loan demand.

Brian, you provided the addition in the balance sheet for loans and deposits from Peoples. Do you happen to have what the securities addition is from Peoples?

It's - Well, I think it starts at about $120 million, but as usual on day one, we look very hard at if they have a lot of small individual, we exit those, and then the decision is whether we replace those, so where we managing our liquidity here in the first quarter, and I think you'll see us settle in by the end of the first quarter as to what that earning asset makeup is going to be but we're taking our time here a little bit.

Okay. That's helpful. And previously you guys have talked about profitability goals, return intangible assets and you guys provided some great guidance on this call, we appreciate that. At the risk of being too greedy, any commentary on profitability outlook with the addition of Peoples in the 2018?

Well, Matt, [indiscernible] Brian may kick me under the table. But one question that was asked after we provided the $1,000 bonus to a group of our associates who typically don't receive bonuses is - one thing we're talking about internally, this will be breaking news for our team-mates across the country is, if we, and we believe we should be able to do it, deliver 1-plus percent return on assets or greater this year in terms of getting to that run rate. And we deliver for our investors, our targeted double-digit return on tangible common equity, we're going to have a reward of bonus in place for that same set of associates at the end of this year. We want every team-mate rowing in the same direction. And I'm not saying that I think we can get to those targets for the year on the whole, but I'm a believer that we have it within us to get to those run rates this year and feel good about the momentum. Brian hasn't kicked me yet, so he must be okay with it. That's where we stand on that, Matt. So you know what, you asked the question that's the answer I'll give you.

Okay. That's helpful, Tim. And Brian, sorry about that.

No worries. No worries.

And just one more clarification on that, the return on tangible assets in the fourth quarter, I think you said it was 88 basis points. Did I hear that correctly?

That's what - yes, on an adjusted basis.

Adjusted, okay. Great. Thank you, guys very much.

All right, Matt. Thanks.

Your next question comes from the line of Tim O'Brien from Sandler O'Neill. Please go ahead. Your line is open.

Good morning, Tim. And Happy New Year.

Hey. Good morning, everyone. This is actually Thomas Gagan [ph] on for Tim today.

Hi, Thomas.

And so we just had a quick few questions. We were - in relation to the OREO sales, we're just wondering if there's any sense of the timing on what those sales might be and any gains associated with them?

Tom, this is Rick. Good question. Look, we have several properties that are actually under contract. But as in all cases, we're very cautious about any specific timing or guidance because these often take quite a bit of time to resolve. So as in the past, we'll see that lumpiness or sort of that movement quarter-to-quarter. We do feel confident there's very good opportunities within that book. Anything you would add, Brian?

No, I think that's fine. Thank you.

Great. Just related to the PCI loans and pools of those loans. Did any of those pools fully mature? And do you guys realize a residual loss?

Actually, quite a few have matured over the last few years. We started with over 30, Thomas, so the challenging accounting of that. And we've been very good about not realizing losses on the extinguishment, the finalization of a pool. We still have high teens number of pools still open and working through those.

And just another way I think about it from a return standpoint, Brian, is life today, on those required pools, our economic return, I can see Brian scrambling through his notes.

$223 million.

Yes, so we feel pretty good about the way that these loans pools were purchased. They continue to do well for us. Thomas, back to your first question, I will say, there is one large loan we're working through, an acquired loan that we believe has a very nice gain in it. The question is, will we need to - these are just some legal issues, but will we need to take it into special assets and into OREO, it's in special assets but take it into OREO to then get it processed. And I guess that's a little bit of guidance as well because you could see one blip in OREO. If that happens, it's just part of this resolution process to get to what we believe will be a nice gain.

Okay. Great. And then just going back to the PCI pools. It sounds like just going into the future, you don't really expect any residual losses with those pools?

No, it's - look, we've a quarterly re-measurement process and our team has been very good about projecting what they are clients were able to do and the resolution of those losses.

Our auditors, KPMG give those pools a tremendous amount of attention, we give them a tremendous amount of attention. We take pride in the way we've realized economic returns from those pools. And so we don't have any concerns at all. I worry about a lot of things, that's not one that I'm worried about.

Perfect. All right. Those were all my questions. I'll step back from here. Thanks, guys.

Thank you, Thomas. And tell Tim we missed him.

Now I'm showing we have no further questions at this time. I will turn the call back over to Mr. Laney for his closing remarks.

Thank you, Krista. I just want to thank everyone for joining us this morning, and I'll - I don't think it's too late to everyone a happy new year, let's have a great 2018. Thank you.